Good day and thank you for standing by. Welcome to the Health Catalyst Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question-and-session. [Operator instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I’d now like to hand the conference over to your speaker today, Adam Brown, Senior Vice President of Investor Relations, Financial Planning and Analyst for Health Catalyst. Please go ahead.

Good afternoon and welcome to Health Catalyst’s earnings conference call for the fourth quarter of 2021, which ended on December 31, 2021. My name is Adam Brown. I am 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. 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, the 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 the third quarter of 2021 filed with the SEC on November 09, 2021 and our Form 10-K for the year ended December 2021 that will be filed with the SEC today. 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?

Thank you, Adam and thank you to everyone who has joined us this afternoon. Before we begin, we at Health Catalyst wanted to express that our thoughts, prayers and support are with the people of Ukraine as they respond to the invasion of their country. Now, let me transition back to sharing our fourth quarter and full year 2021 financial performance, along with additional highlights from the fourth quarter. I will begin today's call with some commentary on our fourth quarter and full year 2021 financial results. Reflecting back on 2021, I am extremely pleased with all that we accomplish during the year, especially in light of the continued challenging macro environment. For the full year 2021, our total revenue was $241.9 million. This represents 28% year over year revenue growth, and it represents an outperformance of over $12 million relative to the midpoint of the guidance that we shared at the beginning of 2021, after investing for our Twistle acquisition. Likewise for the full year 2021, our total adjusted EBITDA was a loss of $11.2 million. This represents an improvement of $10 million relative to 2020, and it represents an outperformance of over $6 million relative to the midpoint of the guidance that we shared at the beginning of 2021, after adjusting for our Twistle acquisition. Looking at the fourth quarter of 2021, total revenue was $64.7 million and our adjusted EBITDA was a loss of $6.3 million with these results beating the midpoint of our quarterly guidance on each metric. Stepping back to comment more broadly, I want to acknowledge how seriously we strive to keep the financial commitments that we make to our investors. We have now reported as a public company for 11 quarters following our IPO in July of 2019. As I reflect on this…

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 overall 2021 financial performance. I will now comment on our strategic objective category of scale. For the fourth quarter of 2021, we generated $64.7 million in total revenue. This total represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 21% year over year. For the full year 2021, our total revenue was $241.9 million representing 28% growth year over year. As Dan mentioned, we are pleased with this full year total revenue performance represents a significant outperformance relative to the guidance we shared to begin the year. Technology revenue for the fourth quarter of 2021 was $40.1 million representing 24% growth year over year. This year-over-year growth was driven primarily by recurring revenue from new customer additions from existing customers paying higher technology access fees as a result of contractual built in escalators as well from our Twistle acquisition that closed on July 1, 2021. In Q4 Twistle contributed $1.8 million of technology revenue, inclusive of a purchase accounting related deferred revenue write-down, which was in line with our expectations. For the full year 2021, technology revenue was $147.7 million representing 34% year-over-year growth. Professional services revenue for Q4 2021 was $24.6 million representing 17% growth relative to the same period last year. This year-over-year performance was primarily due to our professional services being provided to new DOS subscription customers, as well as a modest amount of unforecasted non-recurring revenue that was recognized in quarter. For the full year 2021, our professional revenue was $94.2 million representing 20% year-over-year growth. This professional services full year revenue growth represents a meaningful outperformance relative to the expectations we…

Thanks, Bryan. In conclusion, I would like to recognize and thank our highly engaged team members for all they have done to further our mission and growth in 2021. And I would share that I have never been more energized by the opportunity I see in front of us heading into 2022. And with that, I will turn the call back to the operator for questions.

[Operator instructions] Our first question will comes from the line of Ryan Daniels from William Blair. Your line is open.

Yeah, guys, thanks for taking the questions and thanks for all the detail and congrats on the strong year. I wanted to go into the net new client ads. Obviously a nice metric and solid rebound from what the organization saw on the prior year. And I'm curious if you can go into a little bit more detail on any nuances there either geographically or an end market, were most of those still within the core health systems, or were you able to branch out internationally with some of those sales or into other areas like life sciences?

Yeah, thanks for the question Ryan. Most of those net DOS subscription clients did come from our core market, but we did see a modest contribution from those adjacent markets as well.

And in terms just additional detail Ryan there in terms of the contribution for the DOS ads last year, we did note in the prepared remarks that did include a modest contribution as well from some cross sell initiatives, as well as our DOS light offering.

Okay, perfect. And then in one of your case studies, Dan, you mentioned reducing a form of manual labor on chart abstraction, which helped improve employee satisfaction and push more value added activities. And I'm curious if you're seeing more demand across the board for solutions like that, given the provider burnout we're seeing and workforce pressures, especially in the nurse, practitioner nurse and physician markets, is that something that you see as a growth opportunity or solution set that you can actively sell into your customer base?

We do. And we are seeing that general trend, as you mentioned, Ryan labor and staffing issues, particularly among nurses and other clinical professionals is a real problem for most healthcare organizations today and burnout is really a significant contributor to that. One of the strengths of Health Catalyst long term is that focus on team member engagement and so part what we saw in that case study example with Banner Health was an ability to not only deliver those outsourced chart abstraction services through a technology enabled service solution that was better, faster and cheaper. But it was also delivered in a way that the engagement of those team members actually increased at the same time as that delivery of a better, faster and cheaper solution. We're really excited about that offering. It fits right in the center of our mission as a company to help healthcare become more efficient, to help healthcare become better. And so we're excited to see that continue to grow in the future.

Okay, perfect. I'll hop back in the queues. Thank you.

And our next question will come from line of Jessica Tassan from Piper Sandler. You may begin.

Hi, thank you so much for taking the question. I was just hoping to circle back on milestone based contract that you referenced for Q1. Are you seeing customers increasingly sort of air in the direction of contingency based contracting. And is that only on the app side or is that within the DOS all access base as well?

It's not all that common. Most of our contracts are still in that more common recurring revenue based long term arrangement both on the tech side and on the services side, but occasionally we do have a milestone based contract and that can be both on the tech and on the services side though, it's a little bit more common in those non-recurring services type relationships. Those are harder to project as you might imagine than the standard contracts, but the vast majority of our contracts are still more in that normal recurring revenue model.

And just to add to that, Jessica, we do aim to provide our customers with some flexibility, especially as it relates to services engagements with us in that we want to not have that contract model be a barrier to customers adopting more technology, continuing to use our platform. So we do one concept is just that that flexibility is important to us as we really focus on driving improvements for customers.

Got it. That makes sense. And then I think just we were expecting that some of the acquired capabilities would be able to drive incremental subscription revenue at DOS all access customers. Is that still the case? And can you just give us a sense of how penetrated the DOS, all access customers are with your required capabilities? Basically on the -- an update on the cross sell effort. Thank you.

Yeah, absolutely, Jess. Great question. So we were pleased to see the impact of those acquired capabilities driving some of the performance that we reported on for 2021 in terms of our dollar based retention, for example, that certainly contributed to that 112% dollar based retention, which was meaningfully higher than any other year in the company's history. We're excited about the cross-sell opportunity within our DOS client base, as we've described before, when we bring bear a newly acquired technology that falls outside of the contractual definition of what's included in that all access subscription that our clients have. And so that does represent upside meaningful upside, and each time we a new capability that provides an incremental opportunity for upside. So we're excited about that, at the same time cross sell, takes time to develop and mature and iterate on the right approach. There's still long sales cycles and we're still early in that process.

Our next question will come line of Cindy Motz from Goldman Sachs. You may begin.

Oh, thank you. And thanks for taking my question. Very nice quarter. So in general it looked like, you're ahead of where we were thinking too for next year. And I just wanted to delve into this retention rate that's very, very strong here. And, is there a reason why maybe, I understand that, you're still guiding to very high levels, but it would seem to me as customers start to realize the effectiveness of the product, I was wondering if you feel like you're taking share from competitors, but also if it might not stay pretty high, because if some customers are very happy and the results keep coming in, why wouldn't more than sign up for additional services. So that's the first question. And then just with the EBITDA cadence, it looks like you probably will hit if I had to guess breakeven maybe second quarter maybe go negative with again third quarter, but then fourth quarter again, positive. And so then we exit the year with positive EBITDA. Am I thinking about that correctly? And then if you'd like to give any color for beyond that, that would be great, then we'll stop there. Thanks.

Okay. Great question, Cindy. So we'll take the first question around retention rate and how to think about that in 2022 and then we can talk about the EBITDA question as well. So on the first question, we were pleased to see really robust dollar base retention overall at 112%. Now, there were some, some factors that were one time in nature that impacted that 2021 base retention performance at 112%. For example, on the services side, there were some specific contracts that came through that are a little bit harder to project, moving into 2022 and so we want a little bit more data before we feel like we're fully data informed in updating that perspective. We felt comfortable updating for 2022 to a higher level than what we've typically guided towards for dollar based net retention based on the amount of data that we've seen thus far. And certainly we're encouraged by more to cross sell within DOS client base which is encouraging to us, but we do like to be data informed and need a little bit more time to gather some more data before providing any additional updates. Anything you add on that first question, Bryan.

Yeah, just to add to that Dan. So Cindy, if you think about the segments of technology and services, which are both included in our overall dollar based retention rate metric, the majority of the technology expansion is still driven by those annual built-in escalators that are ramping up for existing customers each year, as well as to Dan's point the upsell or cross sell of our acquired applications that just provides a little more visibility and consistency on the technology side. Whereas on the services side, we don't have those same, large kind of built-in escalators and so it truly is more go get into Dan's point can be a little more variable on that retention metric.

Okay. And then as it relates to the second question, as it specifically relates to EBITDA as we mentioned in the prepared remarks, and I might also just to add to the prepared remarks that for both the full year 2022, and for Q1, we're pleased to have achieved what we said we would strive to achieve when we went public, which was to have our core business be adjusted EBITDA breakeven. So that's true in Q1 of this year and for the full year that our core business is achieving at that level of adjusted EBITDA breakeven. We also have shared previously with the Twistle acquisition, there was a few million, approximately $3 million of EBITDA loss that would be added related to the integration of Twistle and their core business performance as well. That'll be weighted more towards the first half of this year. But as you mentioned also we have some seasonality in some of our expenses like the healthcare analytics summit, which hits in Q3 which is a meaningful expense for us. And so we anticipate on a quarterly basis, you'll see some movement up and down, but we're pleased that for Q1 and for the full year, our core businesses that adjusted EBITDA breakeven level.

Yeah. I think you covered it well, Dan and Cindy as well. Just as we think, longer term, so Cindy, we're not providing, specific color beyond 2022 at this point, but as Dan mentioned, we continue to feel confident in our ability to continue to drive profitability progression and operating leverage as we worked toward our, our long term targets.

Sure. That makes sense. And just as a follow up. Yeah. So, obviously if you guys made it more like bolt on acquisitions or things like that, it could change, but I'm guessing that yeah, the progress is still going to be there. And then yeah, if you wanted to give any more color, like, could we see more like KPI Ninja or anything in that regard and then I'll stop. Thanks.

Yeah, absolutely. So to your first point about acquisitions, certainly acquisitions play a factor in the way that our overall company performance plays out. So we keep that in mind. We're are obviously focused on a series of financial components as well as strategic components as we evaluate M&A, and we prefer M&A opportunities that are neutral from an EBITDA perspective to positive, but that isn't always the case and sometimes there's a strategic reason why we still feel good about moving forward. As it relates to KPI Ninja, let me just share a few thoughts there. So first of all, as we shared unprepared remarks from a financial perspective, the KPI ninja contribution is immaterial. So it's a small tuck-in acquisition, but in terms of the strategic rationale, we're very excited about the technology capabilities that will strengthen our data platform value proposition to clients in some specific ways. We are planning that the technology that we've acquired through KPI Ninja will be integrated into our data platform and, and accelerate our existing product roadmap. There's some specific capabilities that we're really quite excited about as it relates to real time streaming capabilities and enhancement of our data capabilities through standardized data ingestion, like through fire, CCD, HL7 data normalization, data sharing and some other interesting overall data orchestration capabilities. It also offers some specific capabilities in our ability to handle the long tail of EMRs from a data integration perspective and is also an NCQA certified data aggregator vendor. So there's a lot of technology capabilities that we're excited about adding and accelerating from a product roadmap perspective of the data platform there. We see specific use cases at a primary level that these capabilities help us with and in pop health in particular at a primary level. There are some secondary benefits also that we think will come to us over time to -- accrue to us over time in the payer space, in the life sciences space, and even in the HIE market where they addressed some specific gaps that existed for us in our solutions set. And we're excited to fill those gaps through the acquisition of this technology. One other thing I'd mentioned, sorry, one other thing I'd mentioned real quick. The KPI Ninja team has a presence in the US with a small team as well as a presence with a small team in India. And we're excited about expanding our global footprint and team member base across the globe and inclusive of growing and investing in our presence in India as well. So this gives us a foundation upon which to build there.

Excellent. Thank you very much for taking my question. It sounds good.

Our next question comes from line of Elizabeth Anderson from Evercore ISI. Your line is open.

Hi guys. Good evening. And thanks so much for the question. My first question is around the dollar based retention rate, obviously that had a really nice step out from 2020 to 2021, we sort of think about the expectations, is that sort of maybe 112 percentish or around that the kind of run rate that we should think about on a long term basis, or were there any, obviously you had some, 2020 was an unusual year for many reasons. So I just wanted to think about, understand how you guys were thinking about that over the longer time.

Yeah. Thank you for the question, Elizabeth. We do view the 2021 performance as very strong relative to what we've seen historically. There were some components of the 2021 performance that informed the fact that we raised our 2022 guidance from where it had been before 2021 to that 108% to one 111% range. But that's the comfort level that we felt given the data that we've seen thus far. So there, there may well have been some one time elements in 2021 that we like to gather a little bit more data before making any other conclusions, so that we can be data informed. So we raised the expectation a little bit for 2022, but we need to keep gathering data before going above that range of 108% to 111% that we described in our prepared remarks.

Got it. That's very helpful. And then in terms of the professional services gross margin, obviously it's nice to see that you were pointing to the mid 20% range for the full year, despite some of the wage pressure and mix. Is that something we should think of as sort of maybe seeing more pressure in the beginning of the year and sort of expanding as we go through the year and sort of lap some of the -- and the back -- lost some of the results from the back half of 2021?

Yeah, that's a good question. I think as we think about the impact of some of the wage pressure items in professional services in particular, we would identify is probably a couple of points of margin pressure there attributable to the need for us to be strong in terms of base salary increases that we offer to team members. Obviously we keep team members and their engagement at the center of the flywheel. So it's very, very important to us to be competitive as it relates to compensation. We also definitely leaned in on behalf of team members, as it relates to their equity compensation component as a really nice long term incentive for our team members to stay a health catalyst and we benefited greatly from that as we shared the prepared remarks with 96 percentile team member engagement as measured by the Gallop organization and much lower turnover than what the rest of the industry is experiencing. As we think moving forward, it's very hard for us to predict exactly each of the components that might impact those gross margin performance levels in the pro services space. We're certainly watching and studying the situation as it relates to which inflationary elements tend to be longer term versus transitory that'll have an impact. But I would share that as we think O over the next year or so, we do believe that this market will continue to be competitive and we need to stay competitive in response to that market, keep our commitments to our team members to ensure that, we stay consistent with our strategy to offer above market compensation to our team members.

just to add to that's

Really helped. Oh, sorry, go ahead.

Oh, no, thanks. Yeah, just to add to that, Dan so on Dan's point around that headwind on gross margin on the professional services side relative to the wage pressure, it does take us a little bit of time to work through price changes on the services side for existing customers where most of our customers have contracts that are long term and kind of pricing in place whereas we have a little bit more flexibility on that from a new customer standpoint. So that is something that we're working on, but can take a little time to play out and to your question Elizabeth on kind of cadence or quarterly distribution of that margin, I wouldn't say that I see a major kind of trend in terms of first half, second half professional services gross margin shifts other than as we've seen in the past pro services gross margin can fluctuate a decent amount on a quarterly basis and annually based on those factors that you mentioned, the wage dynamics and the mix of services and utilization. So it can move around a bit.

Your next question comes from the line of Stephanie Davis - SVB Leerink. You may begin.

Hey guys, thank you for taking my question. Just more of a math kind of question, but as we look at your DOS ad it becomes reflective to the mix of DOS, DOS Light and a broader number of adjacent add-ons. How should we think about the puts and takes to the contribution math and visibility and what this does versus kind of your historical model?

Yeah. Great question, Stephanie, and I'll share a few thoughts to then. Brian, please add. So there is a modest impact, if you think about, the 2021 contributions of net new DOS subscription clients, including a modest number of new structures like DOS Light for example, that might come in at a lower price point. But the vast majority of those net DOS subscription clients were much more in line with what we've seen historically. And so the vast majority are still at that same kind of price point with the modest impact with those DOS Light contributors. And that's how we've thought about it moving forward as well, that the majority of that high teens, the vast majority of the high teens, net new DOS subscription clients that we're projecting for 2022 will fall within that more traditional price point and subscription type with a modest amount of contribution of the smaller DOS Light offerings. And those smaller offerings are obviously started at a lower or price point. They also offer more expansion opportunity relative to what you might see in a more typical contract.

Yeah, I think to add to that, Dan, Stephanie, to your point, as we think about that long term revenue growth target of 20%, plus to your point, we have seen a little bit of a shift in 2021 as an example on the first piece of that long term target, which is that dollar based retention rate metric coming in a little bit higher than our historical 107 to 109. We've typically shared that the balance of that 20% comes from the new customer additions. And so to Dan's point on the the DOS Light contribution and enterprise contribution and enterprise contribution, there's also a retention rate dynamic, that we're trying to work through and think about how that might play out over time. And to Dan's point, we're not ready to kind of immediate pronouncements in terms of a long-term shift on retention rate, being higher and, and the DOS contribution being the balance. But those are the two factors we're thinking through as we go forward.

Understood. That's awesome. Following up on that then how should we think about acknowledging still early on the contribution in, from converting a DOS light client to a full do client kind of what the, the strategy is for going through that process in terms of timeline and maybe to kind of impact?

Yeah, it's a very important question. And in many ways we've been getting some meaningful practice in that regard as we have integrated application layer, companies and organization, where there, there's a, a client relationship there, but it's at a smaller level than what we would be talking about in terms of expanding to DOS. So we have some experience with that. It is, as you might imagine, a longer sales cycle. There's more complexity. Often we have to migrate up in the organization to the C-suite in order to make that, that transition. I think the upside, as we mentioned just a few minutes ago is that there's a lot more expansion opportunity, when we start at a do light level or a at the, at the cross all level with an app slay client relationship. But the downside of the challenge is we have to go get that rather than that, that increase being contractually already built in.

Yeah. And I would just add stepping to that, that at a foundational level, I would say that expansion opportunity still does follow our long-term strategic flywheel orientation of we are starting with an initial use case of bringing in data in a specific department or analytic area we're applying an application to that data identifying unique insights to drive, and we're applying expertise to ensure that those improvement and are executed on. And that really is what that fly will entails and enables us to then expand beyond that department and circulate those successes within an organization and grow from there. So at a foundation level, it's similar, we're just, as Dan mentioned, getting more experience on executing against that quickly across these initial use cases.

Looking forward when we can hear about some of these announcements and conversions. Thank you guys.

Thanks.

Our next question. I come line are Richard Close from Canaccord Genuity, your line is open.

Yeah, Thanks a lot. Congratulations on a good great year and the positive pipeline. Dan, I'm curious if you could discuss maybe how you factored in the current environment for your customers from a labor perspective and maybe how that got factored into the guidance?

Yeah. Great question, Richard. So we are certainly sensitive to the fact that our customers are facing some specific challenges. Certainly the challenges we discussed a few minutes ago around late labor, labor shortages, burnout, difficulty around staffing is a, a thematic element that we're hearing. And that's one of the reasons why I think our, our power labor application suite for example, is, is something that we were grateful to be ready to introduce mid last year towards the second half of last year. And we've seen a lot of interest in using that software to, to get our utilization as, as strong and as positive as possible with the staffing that we have. Likewise as was discussed a few minutes ago, the fact that we can offer some outsourced tech enabled services, that can sometimes help out our clients who are facing a strain and some difficulty retaining existing staff and recruiting new staff has also been an area of growth for us and something that we are excited to see, continue to grow. At the same time, we recognize that there's so much strain within the healthcare ecosystem as we mention or prepared remarks that sometimes that can be a headwind in terms of talking about new areas to focus on new work to do that exhaustion level can be a challenge for us to overcome. But we're working our way through that. And one of the strengths of the company is our depth of empathy and understanding for our clients and the depth of the relationship with clients. And so a lot of what we try to do is meet them where they are try to help with, with areas that give them a greater sense of, of hope and optimism for the future that then often opens up bandwidths to be able to consider new areas of, of growth and expansion.

Okay. And as a follow up since we're sitting here at the beginning of the year, I was wondering if you could talk a little bit about the competitive environment right now, how you're thinking about your market share performance and then maybe commentary on when rates and if you lose, what's the main reason that you lose?

Yeah. Great question. So Richard, we see a competitive landscape that feels quite similar to what we've observed in the past. And, and we think about it in, in three different categories. So first as the data platform category, we continue to see the big competitor as Hong Kong, often with a little bit of help from across industry tech vendor and secondarily competition from EMR vendors, trying to expand into the analytics space. A lot of the same dynamics have been at play and we pleased to see strong win rates through 2021 anticipate those same strong win rates to continue. Occasionally over the years, we see someone at the apps layer or of vendors of the apps layer that, that have started as more of a point. So should try to kind of broaden their offering into more of a horizontal offering. We've seen that in, in the last year or so with a couple of vendors trying to do that in the pop health space, for example, to expand beyond pop health. And we've seen, as we've seen in, in the past a number of challenges with that strategy, we've found that it's a lot harder than it looks to go from a vertical point solution to a horizontal platform. So we anticipate that the long-term competitive dynamic will continue to be really a focus on, on winning against homegrown plus some help from cross industry and winning against the EMRs at the platform layer at the apps layer. It continues to be a very dynamic competitive environment with hundreds of different point solution providers often with very, very significant capabilities in one area or a couple of areas. And those point solution providers we have to compete head -- head-to-head against. So in the pop health space or in the financial space or in the clinical space, we have to meet them and, and match their specific capabilities and then try to showcase why, what we can do below the app layer and above the app layer both at a data platform and aggregation layer, and then above the app layer with our services expertise, make us so much better as a partner, not only in that one point solution area, but also across a broader array of, of problems that these health systems are going to have to face. And that's where we continue to see really strong win rates is, is the fact that we offer a full solution, not just help with one or two use.

Okay, thank you.

Next question. On line of John Ransom from Raymond James, your line is open.

Hey, good afternoon. So you're approaching EBITDA breakeven. You're sitting there with a, $400 million in cash, and I'm just -- I'm sure you've got a parade of investment bankers in and out of your offices. There are a million middle market, HCAT Company platforms out there. So how do you kind of sift through the wheat from the chaff and when you're talking to people who wanna sell you something what, what guidance do you give them not to show you something that's not gonna be interesting to you?

Yeah. Great question John. So we -- we do believe long-term and, and this informed the, the strong balance sheet that, we've driven to have that we can be a consolidator long-term, especially at the apps layer, where, to your point, maybe there's not a million companies, but, but there are hundreds of companies that we respect that we recognize and built really interesting technology that often solves a problem in a really effective way. And, and we try to emphasize humility health catalyst to be excited when we see that tech technical capability that could accelerate what we can offer to our clients and, and the value proposition that, that we can get to more quickly through M&A and through consolidation, we do try to be very disciplined in the way that we think about the strategic framing of acquisition opportunities. And, and we also pride ourselves on often instigating proprietary processes rather than banker led processes, where we cultivate relationships over the long-term with our ecosystem. We have a partner program as, as I mentioned earlier in the prepared remarks, Maxine Lou, who's just been promoted built out health catalyst partner program. And that's an opportunity for us to get to know directly hundreds of these companies that we then build and deepen relationships with. And as we find that there's a great strategic fit, and as it matches up with what we're hearing from our client base as important areas of capability, that's when we narrow the funnel and we deepen the focus on these organizations and it as is often the case, and this was the case with KPI Ninja. There was no formal process whereby that organization was considering selling. We instigated a proprietary process, and that was true of the TWI acquisition as well. And you -- and so we believe that gives us some meaningful advantages. And we try to leverage the fact that the company is often a preferred destination for these startup organizations, because we take care of their people, their team members, and we take care of their clients at a really high level that there's a preference to, to end up at health catalyst. And we intend to use our balance sheet strength to use a significant focus and investment to continue to be a consolidator in the future.

And just to add to that, I thought that was well said on the strategic kind of framework that we use. One other dynamic that we're working through and, and trying to stay aware of is we have seen over the last few quarters evaluate in the public markets shift meaningfully down. And that, that is still taking time to fully play out in the private markets. And so that is a dynamic that we're facing now, where we do aim to continue to be disciplined from evaluation standpoint, a financial standpoint. And we expect that that will adjust and roll through the private markets in the future, but does take some time

A and just to, as a follow up as your customers exit the COVID emergency and hopefully get back to normal, what solutions do you think they will demand of you versus what you've been dealing with over the past couple of years, and how might your, you, how might that inform your strategy?

Yeah, great question. So we feel like we've already seen some early window into how this might play out. And one of the areas that, that certainly increased dramatically in terms of client interest as our clients became more capable, I would say of responding to the ups and downs of, of the COVID pandemic was population health. And certainly another area that that quite relevant through the worst of the pandemic and continues. Yeah, even thereafter is the financial empowerment suite where it continues to be really important on the revenue side and the cost side to manage things very carefully and, and very effectively. So those are two areas, definitely that, that we see increased demand. And I believe that will longer term clinical improvement areas are an area where we're starting to see an uptick where those were some example areas where we saw a pause during COVID and, and we've seen some uptick in that activity as healthcare organizations have a little bit more bandwidth to think about more traditional clinical improvement activities as well.

I mean, do you think though that for all the talk about value based care and pop health and re-sharing has that been overstated a bit or, or most of your clients still in a fee for service world with a kicker, or do you see I mean, certainly in the, for profit healthcare system, it's largely fee for service, but do you see the, not for profits moving more quickly into really taking meaningful amounts of risk?

Yeah. Tell all quick story. My first job at a college was at the Boston Consulting Group, when my second client was a health system, and this was back in the mid-nineties. And I was asked to model out how long will it take essentially to, for the, the whole ecosystem to move to value based care. And I was debating in my mind, whether it would take three or five years and that was 20, 25 years ago. Right. And, and based on the, the research reports that you look at, the latest estimate that I've seen is, is about 10% of, of the revenue based is in true value based risk based models within the provider ecosystem. So we're still only 10% of way there. So certainly this is taking a long time. On the other hand we are seeing more and more contracts that have some component of risk in them among our client provider systems with both commercial and Medicare, Medicaid relationships that there are meaningfully larger components and increasingly more common components of risk elements. And there's an appetite I think in a, in a sense within the provider ecosystem that, that for multiple good strategic reasons, they need to be learning how to, to take on more risk learning, how to, to operate at effectively in a value-based care world. Because even though it's taking a while, in many ways the train has left the station on the increased prevalence of risk and understanding and, and utilizing and managing risk effectively as a provider I think is something that is here to stay. And that's one of the reasons why we've seen an uptick that I think will be more long, long lasting in terms of pop health offerings.

And I'll remind you, electric cars are only 3% of the cars sold too. So…

Kind of the same thing take time. You're right. You're right.

Thank you.

Our next question will come from the line of David Grossman with Stifel, you may begin.

Thank you. It's getting kind of late here, so maybe we got just limited to one thing, and you've given some great detail in some of the previous questions on your services business. it sounds like the services segment has become less predictable impacting retention and margins. So first am I interpreting -- interpreting that correctly? And if so, is this really just an artifact of the pandemic tight labor markets and kind of some financial distress at your customer, or are you really preparing for a more fundamental secular shift in how the client is going to consume your service offering?

Yeah, it's a good question. David, I'll share a few thoughts then Bryan, please also share, I think there's a -- there are components of the variability of our services business that have been consistent for many years now and we've spoken many times about them. For example, the mix of services that is demanded is something that we allow to shift over time based on a primary focus of ours being what does a client need to be successful and realize measurable improvements as Bryan mentioned a few minutes ago. And, and so if that mix shifts more towards lower margin, or if that mix shifts from recurring revenue services to project based non-recurring revenue services, we're very comfortable with that. And we operate as a business with the primary focus on client success from a professional services perspective. And so, as we've seen over the last 11 quarters of, as a Public Company, the gross margin in the pro services space is as low as 20% and as high as high thirties. And, we're comfortable with that. And we've tried to be transparent about that as a long-term component of our business, that we will continue to, to optimize first for client success, so that's something that hasn't changed and that we believe will continue to factor into our services overall performance. Now, there's some specific elements in the near term that we're watching. One of which iis thing we talked about earlier that the tight labor market, the impact of inflation, the impact of needing to increase wages for our services based team members and understanding which components of inflation pressure are long lived and which are more transitory, is something that we're watching over time. And, and to your point, also, David there, there may be some components of the mix of services that are being offered that could be related to the pandemic. And so another component for us before we would make any pronouncements about updates to our long-term guidance, for example, would be allowing ourselves time to observe as the nation and the world hopefully gets through the pandemic. And we move into more of an endemic state to really observe, were there some structural elements that were just specific to the pandemic that, that now come back to a, a different state or were these a more permanent, long standing shift. And we want the benefit of, of observing that for a period of time before making any long-term updates.

Yeah, I agree. Agree, Dan, I think David, you, you characterized it well in terms of having a little bit less visibility into that segment is something new for us. And that actually provided us a little bit of upside in our 2021 performance, with some outperformance on that, on that revenue segment. So there is more variation there and, and agreed with what Dan said, the new dynamic in 2021 That we're wanting to kind of see how that plays out through 2022 so that we can assess that go forward profile.

Right. So if you, if you think about the dynamics impacting that business today, though, is it fair to say that and you would never say this as a blanket statement, but just given what now a low watermark in terms of you've got wage inflation, so you've got margin pressure, you've got some variability and mix of outsourcing versus maybe more strategic professional services. So is that the right way to look at it that we're probably in as uncertain environment for that segment, as we would expect to be at least based on what you've seen as historically?

It, it could be, it could be. And at the same time it's also pushed us as an organization to think about how can we do things more efficiently? How can we broaden and rethink the way that we deliver services. One of the things that I mentioned earlier about KPI Ninja that we're excited about is, is more of a global presence, a presence in India, and the thought processes around where we can provide services and how we can make them more efficient, I think makes us stronger. And so we're, we've appreciated that. And then we'll see and, and if, if you're right, then there may be some some future upside but we're not certain how that will play out. And so we want to gather some more data first.

Next question comes from the line of Daniel Grosslight from Citi, you may begin.

Hi guys. This is Anna hazinski on Daniel. Thanks for taking my question. I wanted to go back and ask about the higher hosting cost headwinds associated with transitioning a portion of your customers to be as Azure platform. Just wondering if you anticipate that the customers paying higher access fees and the built in price escalators will continue to more offset these headwinds for '22 as your technology gross margins, continue to expand nicely?

Yeah. Thank you for the question in Anna. So we do anticipate finishing that transition, which has been a couple of year headwind in transitioning some on-prem clients to the Azure cloud environment. That should be completed by the end of this year. And so that will be the point in which I think we'll have some of those headwinds behind us. And then we do anticipate that you'll see some meaningful positive expansion over time. Though, as we've shared in the past, the, the data platform business from a gross margin profile perspective, we believe long-term will be a lower profile relative to the apps layer, gross margin, but as the mix shifts over time, towards more and more revenue technology revenue coming through the apps layer, that's where you see a favorable trend towards the overall gross margin moving towards those longer term targets that we've talked about.

Okay, thank you. That's super helpful. And then if I could ask one more I know you mentioned a modest contribution from the dots like customers, but I was curious if you could share what types of clients have seemed to be most receptive to this type of pricing model?

Yeah, absolutely. So we have not modified the target client profile that, that we're focused on in terms of who would be a great long-term fit. So the same guidance that we've provided in terms of net patient revenue on the provider side, for example, has applied. What we found to be the, the most telling factor is often where we can get traction within the organization. As Bryan mentioned a few minutes ago, often there's one department that is facing one specific issue or problem, and our ability with us light to be we competitive from a price perspective relative to point solution players is the major advantage and an opportunity for us where we've done a little bit better than what we have done in the past when we didn't have a do slide offering and wouldn't be advanced in the process, especially when it's just a single department that's focused on, on a single use case. So that's, that's the scenario where we've seen a little bit better traction with the benefit of DOS light than we saw before introducing DOS light.

Yeah. I agreed with that, Dan and that, yeah. I agree with the, the comment around. No major shift in terms of the type of, of customer and market. But I would note that in terms of the use cases I would share what Dan men as well, where we, we do continue to see demand in both the revenue and financial optimization side as well as the population health value based care side, and do believe that we have some targeted do light use cases, standard situations where we are. We are more competitive in those instances now.

Our next question comes from the line of David Larsen from BTIG, you may begin.

Hi congrats on the quarter. I thought I heard in your prepared comments, some detailed discussions around a denials management solution. And do you have like that module built? And if so, like how, how new is it? That's one of the biggest challenges that a lot of hospitals are facing with denied claims. And, and if you can address that effectively, it obviously accelerates cash to hospitals rapidly. So I would think that that would be of high value to hospital [indiscernible]? If just any color around that would be helpful.

Yeah, absolutely, David. So as is the case across all of our offerings and, and inclusive of the financial offering and, and specifically even more narrowly as it relates to the Niles management solution that we spoke about in our prepared remarks DOS or the data platform is the foundation of, of gathering the right information that is necessary in order to make progress there and understand the specific opportunities for improvement. Then above that, as we've discussed in the past, part of what we offer at the app layer includes a library of lighter touch analytics, accelerators that are visualizations that can be customized to a specific situation at a, at a specific healthcare organization. In this case, we used one of those analytics accelerators to help Albany -- Albany meds specifically visualize where the opportunities existed and then, and then act on those. And so that is something that we were able to, to leverage the DOS infrastructure, the data platform in infrastructure, and then they just needed a lighter to solution at the app layer to really visualize what they cared the most about, and then go after the, the savings and the improvement. And, and it is something that we could leverage and replicate elsewhere as well.

And just add to that, David, Dan's point on the foundation of these analytic use cases being DOS. One, one thing I wanted to call out that I think is important differentiator at our foundational DOS level is the DOS platform is open and self-service, and our customers do build their own reports to Dan's point customize starter set dashboards and the like in a self-service way, which we think is differentiated in the market for healthcare and so we do use that self-service building as well as the customization that customers do to inform our, to your point kind of longer term application roadmap.

Great. Thanks very much. And then was there a deferred revenue drag in the quarter that you did not add back and will there be a drag in 2022 that you're adding back? And can you quantify how much that is?

Yeah, some, some, some in particular related to the main headwind that I called out in the prepared remarks, David of the Medicity decline. So Medicity is primarily technology revenue, the legacy revenue based, and as we've shared over the last couple years does continue to decline. That's the primary kind of drag I would call out in terms of what we see going into 2022.

Okay. But there's, there's not like an acquisition related deferred revenue adjustment. That's, that's a headwind Okay. Thanks very much, that's all I had. Yep.

Small amount Q1. Yeah. Remaining for TWI for that write down. That's true.

Oh, okay. Great. Thanks very much.

Thanks, David.

Our next question will come line of Glen Santangelo from Jefferies, you may begin

Yeah, good evening. And thanks for taking my questions. Dan and Bryan, I just have a high level question and then a modeling question. First I, it sounds like you have a fair amount of client momentum and you finished up the year pretty strong on the DOS light side or record dollar based retention. You did a couple of acquisitions and you have some cross sell opportunities. I think you high highlighted in your prepared remark, strong bookings in 4Q. But yet when I look at the, the fiscal '22 revenue guidance, you're calling for deceleration of your revenues by six or 700 basis points. And, and it just seems inconsistent with the, with the client momentum that you seemingly have. And I was just wondering if you could maybe just frame that for us a little bit. I'm, I'm sure there's some level of conservatism maybe you're building in there -- I just, any high level thoughts around that, that inconsistency?

Sure. Yeah. Happy to comment. And then Bryan, please add as well. So we were pleased with the, the strength of the 2021 performance, both with existing clients and with new clients and encouraged by that. There were some elements that moving forward into 2022, both on the tech side and the services side that we wanted to pay at tension to, as we thought about our guidance. I will note that as we mentioned in the prepared marks at the midpoint our guidance for the year 2022 represents 20% year over year growth, which is consistent with what we've shared long-term as the company's growth profile of 20 plus percent. It's similar to the way we've thought about things in the past. But as we think about 2022 in particular on, on the tech side, as Bryan mentioned earlier, there is a, a headwind as it relates to the Medicity business that that will impact our tech overall revenue performance. And then on the services side in 2021 we did realize some specific services revenue around non-recurring contracts that are harder for us to predict. And there was a timing element in 2021 also that we called out in the prepared remarks where signed a particularly large surfaces contract a little bit earlier in the year than we would typically see. And so, as we look forward to 2022, we've tried to normalize for a couple of those factors, but even with those factors, we were pleased to be able to guide to at the midpoint that 20% growth level for 2022.

The only other thing I would add to that, Dan, to your question Glen on 2021, I think full year revenue growth, just wanted to, to point out that 2021 did have the vital wear in organic contribution for a good portion of the year, given that we completed that acquisition in Q3 2020. So you would want to factor that in, in thinking through the growth rate for 2021 as compared to going forward. And you could look at Q4 as an example, where-by had lapsed by that point in time in Q4 2021.

All right. That, that, that's perfect. That, that makes a lot of sense. Thanks for welcoming through that. And then maybe secondly it sounds like you're continuing to make progress on the margins could you maybe just give us a sense for embedded within that fiscal '22 guidance? what, what level of, of stock based comp you're assuming? So we can ultimately think about, think about that as it may relate to the balance sheet and cash flow statement? Thanks. And I'll stop there.

Yeah. Thanks Glen. Yeah. So in terms of stock based comp what we saw in 2021, I'll just point out a couple of items there first. So 2021, I think as does have one nuance around stock based compensation that is related to re vested acquisition consideration from prior M&A deals where that is considered from an accounting standpoint, stock based comp, but it's really upfront acquisition over time. We do break that out in our financial statements. So you'll be able to kind of see that contribution when you think about stock based comp overall, and as a percent of revenue. When we look at as a percentage of revenue, so in 2021 excluding that re vested consideration, we were in the mid 20% range. And then as we head into 2022 we, expect generally to have operating leverage on that metric as a percentage of revenue. But we did try to be really thoughtful from a team member standpoint in terms of ensuring long-term incentivization and retention of team members for 2022 and beyond such that we expect to be in a similar range around that mid-twenties level, as a percentage of revenue for 2022 And really wanted to just be thoughtful about getting ahead of what some people are seeing in this tight labor market around the potential great resignation and other turnover dynamics where that is obviously very important for us to ensure that we continue to attract and retain over the long-term, these talented team members. So that's what we, that's what we see in 2022. And then as I mentioned over the coming years, expect to drive leverage in that, in that metric going forward.

Thank you. I'm not showing any further questions in the queue. I'd like to turn a call back over to Dan for any closing remarks.

Thank you all again, for your interest in Health Catalyst; we appreciate your questions and we look forward to having great future discussions as well. Have a good evening.

This concludes today's conference call. Thank you for participating. You may not disconnect everyone have a good right.