Welcome to the Health Catalyst Third Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] And I would now like to turn the call over to Adam Brown, Senior Vice President of FP&A and Investor Relations. Sir, please begin.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the third quarter of 2022, which ended on September 30, 2022. My name is Adam Brown. I'm the Senior Vice President of Investor Relations, and Financial Planning and Analysis for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer; and Bryan Hunt, our Chief Financial Officer. . A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. During today's call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies, the impact of the COVID-19 pandemic and inflationary macroeconomic environment on our business and the 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 Q2 2022 filed with the SEC on August 5, 2022, and our Form 10-Q for Q3 2022 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of these non-GAAP financial measures to their most comparable GAAP measures is provided in our press release. With that, let me turn the call over to Dan for his prepared remarks, and then Brian will subsequently provide his prepared remarks. Dan and Brian 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 third quarter 2022 financial performance, along with additional highlights from the quarter. I will begin today's call with some commentary on our third quarter 2022 financial results by sharing that we are pleased with the company's overall financial performance. Our Q3 2022 total revenue was $68.4 million, representing 11% growth year-over-year, and our adjusted EBITDA was a loss of $4.6 million, with these results beating the midpoint of our quarterly guidance on each metric. Additional financial highlights from the third quarter include our technology revenue of $44 million, representing 15% growth year-over-year and our adjusted overall gross margin of 51.2%, representing an increase of approximately 25 basis points year-over-year. Now let me highlight some additional items from the quarter. You will recall from our previous earnings calls that we measure our company's performance in the three strategic objective categories of improvement, growth and scale; and we'll discuss our quarterly results with you in each of these categories. The first category, improvement, is focused on evaluating our ability to enable our clients to realize massive, measurable improvements while also maintaining industry-leading client and team member satisfaction and engagement. Let me begin by sharing a few examples of client improvements from recently published case studies. First, as part of its population health strategy, WakeMed Health and Hospitals utilized our software, including our DOS data platform and healthcare.ai to meaningfully improve its patient access performance. Prior to implementing our solution, WakeMed knew that its patients often had trouble accessing its system, but it lacks the actionable data that would enable the identification, prioritization and management of improvement opportunities. Leveraging our technology, WakeMed can now visualize patients across key performance indicators, including referral conversion…

Thank you, Dan. Before diving into our quarterly financial results, I want to echo what Dan shared and say that I'm pleased with our third quarter performance. I will now comment on our strategic objective category of scale. For the third quarter of 2022, we generated $68.4 million in total revenue. This total represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 11% year-over-year. Technology revenue for the third quarter of 2022 was $44 million, representing 15% growth year-over-year. This year-over-year growth was driven primarily by recurring revenue from new client additions and from existing clients paying higher technology access fees as a result of contractual built-in escalators. . Professional services revenue for Q3 2022 was $24.4 million, representing 4% growth relative to the same period last year. Overall, our Q3 2022 total revenue performance was slightly higher than our guidance contemplated primarily due to technology environment go-lives occurring on average, faster than anticipated and delayed timing of certain previously known churn events. For the third quarter 2022, total adjusted gross margin was 51.2%. The representing an increase of approximately 25 basis points year-over-year. In the Technology segment, our Q3 2022 adjusted technology gross margin was 68.2%, a decrease of approximately 170 basis points relative to the same period last year. This year-over-year performance was mainly driven by continued costs associated with transitioning a portion of our client base to third-party cloud-hosted data centers in Microsoft Azure, which increases our hosting costs as well as increased support costs partially offset by existing clients paying higher technology access fees from contractual built-in escalators. In the Professional Services segment, our Q3 2022 adjusted professional services gross margin was 20.4%, representing an increase of approximately 40 basis points year-over-year and a decrease of approximately 610 basis…

Thanks, Bryan. In conclusion, I would like to recognize and thank our committed and mission-aligned clients. and our highly engaged team members for their continued commitment to our mission in the midst of challenging circumstances. And with that, I will turn the call back to the operator for questions. .

[Operator Instructions] Our first question will come from Anne Samuel with JPMorgan.

Congrats on the results. You saw your cost improvements come in sooner than expected. I was hoping maybe you could talk a little bit about what you've done there so far and if there's still any areas left receiving.

Yes. Happy to address that. Thanks, Anne. We are pleased to see that our cost reduction objectives are ahead of schedule. And we have found in a couple of areas, particularly those SG&A areas, that we have some meaningful operating leverage. We mentioned in our prepared remarks some operating leverage as it relates to sales efficiency, and we will continue to pursue operating leverage moving forward. Importantly, as we also mentioned in our prepared remarks, we are going to continue to invest from an R&D perspective and some high-priority strategic investment areas, but we were pleased to find operating leverage in other parts of our operation and our operating expenses.

One thing I would add, Dan, to that to answer the question, Anne, is that some of the expense reductions you've seen kind of through Q3, some were working on in Q4. So there was not a full quarter's worth of kind of impact there yet in terms of our OpEx in Q4, and then we'll likely work through some in early 2023. And so as we get into our kind of final operating plan early next year, we'll provide specifics on more detail in terms of those reductions and our progress on EBITDA and cash flow.

That's great. Looking forward to hearing more color on that in the future. You also had some really encouraging commentary on the pipeline, and I was wondering if you could talk a little bit about, is that related to dollar [ rate ] retention since you were able to raise there or if you're also seeing a new client demand as well? And maybe what sort of the conversations are like with prospective customers right now just given the macro environment?

Yes. Happy to address that, Anne. So we do see meaningful encouraging signs with our existing clients, and we see some encouraging signs with new clients. I've spent the majority of my time focused on our existing clients but have spent some time with new clients as well and as mentioned in our prepared remarks, have spent and have the opportunity to have dozens of face-to-face interactions with C-suite executives at our largest clients. And what I would characterize as the environment is, number one, very much a focus on the financial pressure that these health systems are facing; but number two, a really productive series of discussions about us being part of that solution and being able to focus on those parts of our portfolio that really deliver near-term cost savings, near-term financial improvement. And that's the part of our pipeline where we've seen really meaningful expansion. And that's certainly been encouraging to us. So we're excited to see that progression take place, and we've been encouraged thus far. We'll have to see kind of how that exactly progresses. As you know, historically, we've typically had longer sales cycles of about 12 months. So we'll need to see exactly how that increased pipeline plays out over time, but we've certainly been encouraged to see so many of our existing clients and some of our prospective clients also recognize that we have parts of our portfolio that can really deliver for them in the near term from a financial perspective.

Our next question will come from Ryan Daniels with William Blair.

Congrats on the strong performance. Dan, one for you as a follow-up to your prepared comments. Besides the conversations you're having with clients, I'm curious how your organization can actually proactively analyze data to existing clients to help them uncover more near-term savings opportunities and to really propagate best practices between clients to ensure they're achieving improvements.

Yes. Thanks for the question, Ryan. And that's very much the approach that we're trying to take with each of our clients. There's sort of a multilayered way in which we can help them in the near term with their financial savings. The first layer is, as I mentioned just a minute ago and in our prepared remarks, often that direct near-term hard dollar savings that we can offer through something like tech-enabled outsourcing or through our Financial Empowerment Suite of health really helps our clients feel that assurance that those are the kinds of cost savings that they can build right into their budget in the near term. . But that's not where we stop. So there's a second layer, which is that force multiplying impact, which is we not only look for the specific savings within areas where we might take more direct responsibility. But we're also looking much more broadly within the entirety of the health system setting where are there specific data-informed opportunities for improvement. That sometimes those take a little bit more time to go after, but they're actually enabled in terms of the ability to go after them by some of the efficiency gains that we gain in that first category. One example is outsourced chart abstraction, where almost everyone that is involved before we use our tech enablement is typically clinically trained, often nurses that are performing that manual chart abstraction in an expensive and an inefficient way. We leverage our technology, including the DOS data platform to automate certain steps in that process. That frees up clinical resources that can then be redeployed towards specific improvement projects that can be that force multiplying cost savings opportunity. And the client doesn't need to come up with incremental budget because they can just redeploy the savings to go after a larger opportunity from a cost perspective. And so that is an important part of that multilayered partnership that our clients get with us is, yes, the direct cost savings from some of the specific parts of our portfolio but also that second layer of force multiplied cost savings across their organization.

Just to add to that, Dan, the other component, Ryan, that we're working on in addition to the kind of team member contributions that Dan mentioned and the use of the technology to share data and best practices and uncover opportunities for savings, we're also working on continuing to utilize our case studies, our success stories across our client base to share with other clients and prospects and what's working well. We had a great opportunity to do that just recently at our Health Analytics Summit, where there were over 70 clients presenting those best practices, those results that they've achieved recently. And so that was just a great event to get additional feedback and to really promote and share the opportunities across our client and prospect base.

Great. That's super helpful color. I appreciate all that detail. And maybe one more question. As we think about the ability to offer hard dollar savings that clients can actually budget, obviously very attractive. That's going to drive your revenue retention or your pipeline conversion. I'm curious if you've contemplated doing more risk-based contracting given your ability to kind of prove this time and time again. Maybe that touches them forward. Is that occurring at conversations, either at the management level or client level?

You bet. Thanks for the question, Ryan. So we are open to multiple types of structures with our clients. What we're finding that they're most interested in right now and that first category that I talked about is just the ability to budget specific cost savings. Often, in our tech-enabled outsourced contracts, for example, we can write in something like up to 15% savings within the first nine months relative to what they've been spending and do that while rebadging their team members. And when we realize the efficiencies we're able to often still retain those team members, just deploy them elsewhere, in other projects at the same client or in other projects with a different client. And so it's a win for the health system from a cost savings perspective, and it's a win for the team member as well in terms of their career path moving forward. . We've been open to additional shared savings or shared benefit types of models. But often, we find that our clients just appreciate the simple straightforward nature of what we typically offer, which is just especially the CFOs, appreciating that they can budget a specific dollar savings that happens on a very predictable time horizon in that first year. And then we typically agree to a very modest annual increases that often expand the relative improvement in cost structure over time versus what they would have experienced themselves in terms of their own cost structure growing.

Our next question will come from Jessica Tassan with Piper Sandler.

I was hoping you could maybe talk a little bit about how the LifePoint deployment is going. And then just from kind of a tech architecture perspective, can you help us understand how HCAT works either with or alongside of the Google Health Cloud deployment that, I think, LifePoint sort of signed concurrently? Like where does one vendor start and the other end, if you will.

Thanks for the question, Jess. Yes, as we mentioned last quarter and published as a press release, we were really excited to welcome LifePoint as a client of Health Catalyst's. We were grateful to have them meaningfully participating in the health care analytics summit, and we're excited to see the deployment on schedule and moving along meaningfully well. It is a cloud-native deployment. And in this architecture that we referenced in our prepared remarks, part of the benefit of this architecture is its ability to integrate with other modules with other modular components that a client might prioritize as important to them. And so that was one of the elements that was appealing to LifePoint about the architecture that we shared with them, and that's working well so far.

The main focus in terms of our initial use case at LifePoint, Jess, is clinical improvement related to clinical variation, some population health use cases as well all leveraging the data platform. And from what we understand, the initiative with Google is a little bit more so focused on that kind of front door to the health system, getting out to patients and [indiscernible] patient records. So it is a different use case that we have there currently.

Got it. And then if I could just squeeze in one more. On the tech-enabled outsourcing, I feel like we've seen that come up more and more in the last couple of months. Can you just help us understand where does that fit in terms of services or tech revenue? And then is that considered recurring revenue? And kind of what does that offering consist of from -- yes, just like what types of services?

Yes, absolutely. So we do classify the tech-enabled outsourcing as services revenue. And it's been 1 of the services offerings that we've offered now for 8 years. And so we have a meaningful track record and quite a bit of experience offering tech-enabled outsourcing to a number of our clients, starting with Allina Health years ago. . Some of the areas where we have the most experience include outsourced chart abstraction like we shared in the prepared remarks that Banner Health and others are leveraging and realizing meaningful cost savings. It is typically structured as a multiyear contract, often a 5- or longer year contract of recurring revenue on the services side. One of the other benefits that we've seen over the last eight years is because we use our own technology to produce that meaningful savings often up to 15% savings relative to what the client has been spending, we do require that, in most cases, that our clients remain current on their technology subscription. And so we found over time that the stickiness of the technology subscription is very strong, very significant in all of our relationships where we have tech-enabled outsourcing in place as well.

Right. Yes. And so there is, Jess, a component of both technology and services in terms of the revenue drivers there, as Dan mentioned. So the technology subscription, use of the data platform, increased utilization there hit the technology side. And then the kind of offering that Dan mentioned of analytics or chart abstraction hits more on the services side from a revenue standpoint.

Our next question will come from Elizabeth Anderson with Evercore ISI..

One of the things that struck me when you guys were speaking at, I think I hadn't heard this before, as you were talking about the delay of a certain churn event benefiting revenues. Is that sort of like a change in the churn event itself? Or is that sort of just a push out of that? I was wondering if you could just sort of give a few more details on sort of your expected timing there. That would be helpful.

Yes, absolutely. So Elizabeth, we have been encouraged and a couple of things that we mentioned in our prepared remarks. I mentioned that I have been encouraged to see the existing client pipeline expand meaningfully, and we've also seen a relative modest reduction in the forecasted churn that we were expecting in 2022. We've also experienced, as Bryan mentioned in some of his prepared remarks some delays in potential churn that we had forecasted. And sometimes, that results in just there being a delay. Other times, it results in the client making a different decision. And we appreciate the opportunity to have a little bit more time to explore how to move forward in the most positive way with our clients. So both of those dynamics are elements that we've observed.

Got it. That's really helpful. And then I think you also talked about as well as sort of customers being more interested in sort of short-term ROI, hard dollar decisions, you also talked about some investments that you guys have made in sort of improving the ROI or the speed of the ROI on your core DOS platform. I was wondering if you could expand on that a little bit, like what those are that -- I'm sure it's early in that progression, but if you could talk a little bit more about that as well.

Yes, absolutely, Elizabeth. So our clients are definitely focused on how can we alleviate our own financial pressures and what opportunities do we have, both with technology and with services that will enable that to occur. And we gave a few examples in our prepared remarks, for example, in the area of tech-enabled outsourcing, we've been investing in tech that more quickly automate certain processes that were manual. A good example of some of that tech includes the acquisitions recently of ARMUS and KPI Ninja. Importantly, KPI Ninja is becoming an important part of our data platform. And it does enable us, from a time-to-value perspective to realize some of those automation steps faster than we otherwise could have. Likewise, when we think about the foundational value proposition of the data platform, we want to make sure that time to value is always really strong. And the investments that we're making in the cloud-native architecture speed up the implementation time and our ability to scale up in terms of the data that's flowing into the data platform much more quickly and much more significantly, which just opens up ROI use cases much sooner than they otherwise would be available to the client.

Got it. But you don't have a specific time line on sort of like a new time line. I know previously you talked about it sort of like more like a two-year period, you don't have a specific new period. You're just making improvement across the board as you guys see fit?

We are. We shared in our prepared remarks that we expect that most of the investment in this next iteration of our data platform will be completed in 2023. And then we'll be working with clients and migrating them to be able to take advantage of all those capabilities over the next couple of years. .

And just to add to that, to your question, Elizabeth, there are ways that we are driving that hard dollar ROI savings a little more quickly than what would be typical with kind of an analytics platform deployment. And that is that based on focusing on those three areas that Dan mentioned of the Financial Empowerment Suite, the Pop Health Suite, the technical outsourcing, which can drive that budgeted savings more near term. And then in addition to that, we still have that kind of core analytics value proposition, where once you're using the data, you can identify myriad ways to drive additional costs or improvement work on top of that data. And we're trying to, again, speed up that component as well.

Our next question will come from Stephanie Davis with SVB Securities.

This is Anna [ph] on for Stephanie. We've seen some mixed data points on IT spend trends across providers -- so I was hoping you could share some color from your recent client conversations, where are folks are investing and where are they pulling back?

Yes. It's a great question. Thanks, Anna. We would observe, and I would personally observe just having completed dozens of these face-to-face discussions with CIOs as well as CEOs, COOs, CFOs, that, as we mentioned in our prepared remarks, there's a very significant focus on what solutions deliver near-term hard dollar financial results. And there's a definite shift away from what I might characterize as the more traditional sort of science project, and we're really excited about this new technology and you need to come up with new budget, and there's no guarantee as to whether it will produce anything from an ROI perspective. There's actually been a lot of that in health care over the years. And I have certainly heard over and over and over again our existing clients pivoting strongly away from those and in many cases, consolidating what remaining spend that they're prioritizing on fewer long-term partners like Health Catalyst. And we happen to also share a number of customers with Epic, and there are definitely another consolidation platform where we see our clients doing more and more with Epic, and we encourage that mindset and that strategy. . And often, our clients are able to realize a much more significant ROI on the investment they've already made in those consolidation platforms, and we're fortunate Health Catalyst to be considered one of those consolidation platforms. And we're fortunate to have a few elements of our portfolio that are specifically designed to deliver that near-term ROI. And that is absolutely kind of 100% my conversations with C-Suite executives have been focused right on that ROI and making sure that all of their investments are going to produce a very measurable hard dollar ROI or they're not investing.

Got it. All right. And then as a follow-up, given the current labor market, can you give us an update on where you're recruiting from? And just how this evolved over time? And how are you ensuring that your incoming talent fill as adequate health care expertise?

Yes, absolutely. Great question. And we are seeing that as, I think, the broader industry experiences some more headwinds in terms of its financial performance. Certainly, we're finding that there's a little bit more equilibrium in terms of labor supply and labor demand. It's still challenging, but we have benefited Health Catalyst from a long-term multiyear, more than a decade focus on being a highly engaged employer and the best place to work. And so we continue to benefit from that. We continue to see turnover rates that are well below industry averages and very, very high engagement levels. So when we do have open positions at Health Catalyst, we benefit from the fact that we get many, many applicants for those positions and a very high conversion rate when we extend offers. That is a process where we will never be done, focusing on high team member engagement. But we have found that that's a benefit that Health Catalyst realizes, and it's one of the reasons why many of our clients are interested in tech-enabled outsourcing, where they've had a lot of difficulty from a hiring perspective and a retention perspective, and they see the results that Health Catalyst has achieved and believe that we can help them benefit from much higher engagement levels and much lower turnover levels as well.

Just to add to that, we are also focused, Anna, on, as we mentioned, driving additional efficiencies in areas like SG&A, in particular, on the services side and the like. But we are investing in certain areas as well. And so that's where a little bit more of the hiring, like ensuring that we have the right health care-specific talent comes in, is more so on the R&D side, in particular, related to our platform and other investments.

Our next question will come from Richard Close with Canaccord Genuity.

Congratulations. Dan, maybe expanding on tech outsourcing. I'm curious how you think about the company, the company's overall business longer term. And that is the mix between technology and professional services revenues longer term and then the gross margin profile of the company.

Yes. Great question, Richard. So as you will recall, because you were there when we went public 3.5 years ago, we talked as part of our IPO road show about the fact that services is a really important part of our overall solution set. And at the time of IPO, we were closer to 50-50 in terms of the tech and services mix. Now over the next three years or so, we found that our tech revenue grew at a faster pace than our services revenue. And that happened for a variety of reasons, good reasons, and we expanded our tech portfolio to be much more compelling and much more comprehensive for clients. When I think forward to the next few years, I wouldn't be surprised if services catches up to what we experienced over the last few years from a tech revenue growth perspective in terms of getting back to closer to that balance of around 50-50 that we looked like when we went public. And that's how we messaged long term that we expected a really meaningful component of our business to come from both tech and services. We continue to believe that. And we also continue to focus on which elements of our portfolio help our clients be successful given what they're facing. And certainly, right now, we wanted to be transparent with the investment community that we're certainly seeing certain elements of our portfolio, now that includes technology, meaningful technology like our Financial Empowerment Suite, like our Pop Health Suite and even with tech-enabled outsourcing, we use DOS heavily and other components of our technology like ARMUS heavily to automate steps in the process for items like chart abstraction that would have otherwise been manual. And that's one of the reasons why we require that our clients that are using us for tech-enabled outsourcing stay current on their tech subscription for the data platform. And so even in cases where we might see a part of our services mix grow rapidly like tech-enabled outsourcing, it still pulls with it technology at a meaningful level. And in the overall context, we've probably got a few years of services kind of catching up to the revenue growth that we've experienced over the last few years in the tech space.

Just to add to that, Richard, the other kind of item that we're highly focused on is managing to and continuing to drive operating leverage and EBITDA performance. You saw some of that in terms of being a little bit ahead on our 2022 initiatives. We are highly focused on that from an SG&A standpoint, in particular, going into next year. Take those commitments that we made to EBITDA and free cash flow seriously. And so that will be -- to Dan's point, we're seeing a little bit of an uptick in terms of our pipeline on the services side. We'll work through that in Q4 in the first half of next year, but we will continue to drive leverage on the EBITDA and cash flow side.

Okay. That's very helpful. And then you mentioned the investments in the platform over the last couple of years and expectation, a multiyear transition. Can you talk to us about like how you see the impact of that on the number of DOS clients that you expect to be signing over the next couple of years. Do you think people wait until the transition is fully GA, so to speak?

I don't think so. I do believe that with our existing clients, as we mentioned in our prepared remarks, we'll kind of be really thoughtful with those clients about what time frame makes the most sense. And as we mentioned, we've already begun that transition with one of our largest existing clients. And on the new client side, it's actually a lot more straightforward to start with the new technology, the new architecture because there's not a lot of legacy to migrate. And so with new clients, it's more straightforward in that regard. . But we do believe that the feedback that we've received in terms of the architecture itself, its scalability, its modularity, it's very compelling, it's very interesting to both existing clients and new clients. So we're excited about that.

Great. I think the driver of the DOS client adds, which would be less so than technology infrastructure, given we have that, we've been marketing that over time, more so driven by the end market dynamics that we mentioned, the financial pressure on systems. Can we couple that platform use case with the near-term hard dollar ROI opportunity like we mentioned? I think that will -- and/or can we land in certain areas at a little bit of a more narrow starting point like with the DOS light opportunity, can we expand from there, so I think those would be the main drivers as compared to the tech.

And I would share one other dynamic, Richard, that we're watching. I mentioned this a few minutes ago that I personally am spending more of my time with our existing clients. I would say we want to make sure our first focus is always enabling our existing clients to be really successful. We are seeing a pretty dramatic increase in the pipeline of opportunity for growth with our existing clients. And I believe we will prioritize enabling those clients to grow and be really, really successful and get what they need from Health Catalyst first and foremost. And then secondly, we'll focus on how can we add new clients as well. But that will be an impact as well as we evaluate our growth opportunities. And as you know, Richard, it's often -- there's often more leverage from a sales efficiency perspective by growing with existing clients where you already have an existing relationship. And so we will be cognizant of that as we think about our growth trajectory moving forward and the significant opportunities that are presenting themselves for us to expand our relationship with existing clients.

Our next question will come from Daniel Grosslight with Citi.

You mentioned you're seeing new opportunities in DOS light type pricing models. As we think about the mid- to high single-digit net DOS adds this year, what percent do you think will be on the DOS light type modeling? What's the pricing differential between that and the typical enterprise DOS subscription?

Yes, happy to take that, Daniel. So we mentioned in our prepared remarks that we might expect a few of that total number for the year to fall within that DOS light category. And we've shared previously that often DOS light, you can think of as starting at about half the price of a typical enterprise starting point, but we do expect most of our new DOS subscription clients in 2022 to be that enterprise type of starting point.

Got it. Okay. And on the net dollar-based retention of 97% to 101%, is that for both tech and professional services? Or can you kind of bifurcate that out as to the 2?

It is overall. So it's an overall projection. And we haven't shared specifics, but we have shared some directional color over time. And we would share that consistent with what we shared just a couple of minutes ago and answer to another question, we are seeing that the part of our pipeline that's growing the fastest is tech-enabled outsourcing. And so that would push up the services component maybe a little higher than that overall average. And then the tech component may be just slightly lower than that overall range average as well.

Our next question will come from David Larsen with BTIG.

Congratulations on the good quarter. It sounds like attrition levels are improving and the pipeline is improving. Can you provide any color around bookings or backlog and signed deals like with respect to the back half of 3Q '22, what you're seeing so far in 4Q and how 2023 is shaping up?

Yes, happy to. So we are encouraged, David, as you mentioned, to see some improvement as it relates to what we had previously forecasted for churn and certainly a meaningful expansion in our existing client pipeline relative to what we had previously forecasted. Those are all encouraging signs. As we have shared before, Q2 and Q4 tend to be higher volume quarters than Q1 and Q3. And so we have fewer data points in terms of what we observed for Q3, but we were pleased with our bookings performance for Q3 and early in Q4 as well. As we mentioned in our prepared remarks, Q4 always represents an important meaningful part of the year from a sales perspective, both with new clients and with existing clients. And so we're focused on ensuring that we end that year strong. And we're encouraged by the progress that we're seeing thus far.

Yes, I think the only thing that I would add is the late-stage pipeline has continued to progress, David, such that we have high confidence in terms of our coverage for the expansion and new client side that we're working on.

Okay. Great. That's very helpful. And then just with the Life Sciences solution, DOS solution, is that delayed? Or have you decided to sort of not pursue that? Or could you pick it up, like, say, next year or 2 years from now? And then like can you talk about growth in your health plan customers? Would it be possible to create a DOS type of solution for health plans? We charge sort of a PMPM rate and you coordinate care with your largest hospital customers. It seems to me like there's a lot of demand there. We're seeing a lot of growth in entities like Evolent that service health plans. Just any thoughts there would be very helpful. .

Yes. Happy to address both of those. So with regards to our Life Sciences solution, we have paused our go-to-market activities related to life sciences. I do believe and anticipate that perhaps in a couple of years, we'll come back to that solution set. But part of that decision was driven by the fact that, in our core market, we see significant opportunities to do more to help our clients be successful. And that leads to your second question as it relates to what we might offer to health plans. I think our primary focus since inception has been primarily focused on providers. Now many of our provider clients have also grown into the payer space, and we want to grow with them. But our primary focus is still on remaining very deeply aligned with providers and ensuring that we're helping them to be successful. And so our Pop Health offering, for example, is catered towards providers that are moving into the payer space or the health plan space, but it's, for example, very focused on keeping the patient at the center, keeping clinical improvement at the center. And that's not necessarily something that is always prioritized when you come in at, first and foremost, from a health plan perspective. So I think we're going to stay with our core focus on our core market being providers and ensuring that we're helping them in every way possible. But that does include helping them to expand into the payer space and be really effective and successful there.

Our next question will come from Cindy Motz with Goldman Sachs.

And also congratulations on the quarter. Just following up on that last question. I know that you're not giving '23 guidance right now, but you do sound encouraged by your bookings, and it looks like the one client last quarter was just a one-off. It's -- and you raised your net dollar retention guidance to 97% to 101%. Would you expect that 97% to 101% to continue maybe into next year? And if there's anything you can give us just in terms of like relative to this year? Obviously, '23 is still challenging. But would you foresee maybe the growth rate that you were thinking about maybe being a little bit better for next year? And then I have a follow-up.

Yes. Thank you, Cindy, for the question. I would share that from a bookings perspective, we're certainly encouraged by the meaningful expansion in our existing client pipeline that we expressed in the prepared remarks. As you think about how that flows through into 2023, I would expect our dollar-based retention for 2023 to be meaningfully better than our dollar-based retention for 2022. We'll provide more of that color and guidance at our next earnings call. But certainly, we're encouraged by that. Now as you know, based on a recurring revenue business, it does take time for bookings strength and bookings improvement to translate to the P&L. And so as we shared previously, that'll take some time. And 2023, as a result, will still be meaningfully impacted by the fact that our 2022 bookings, while the second half is turning out to be more robust, meaningfully more robust than the first half, we're still for the year behind what we had originally projected. And so that will impact 2023 from a P&L perspective. But we do expect, based on what we're seeing, especially among our existing clients, and as I mentioned in the prepared remarks, having had opportunities to have face-to-face in-person discussions with the majority of our largest clients that they want to expand with us. They want to continue their relationship with us. And they need to help in terms of the cost structure improvements, for example, especially. And we have solutions that can help in the near term, and there's a significant need and interest for that. And so I expect that, that will continue throughout the rest of this year and well into next year as well. And that should directly impact a meaningful improvement in dollar-based retention in 2023, but we'll share more specifics at our next earnings call.

Yes. I think the way we think about it, Cindy, is what Dan said, we're booking this year in terms of dollar base retention rate is kind of the trough bookings year, which does lead to the revenue growth trough here on the P&L being 2023, in particular, the first half of 2023 as we get into next year. But as our bookings continues to improve and net retention improves, that will lead to the growth that we expect to reaccelerate in 2023 second half and then 2024 and beyond.

Okay. Great. And just a follow-up, Bryan. You talked a lot about R&D and being committed to that but also balancing the EBITDA margin growth. I just want to make sure -- so we're still -- because you're doing better this year. Obviously, you're going to come in, it looks like, with less of a loss this year. And so next year, we're at the point where then we're adjusted EBITDA positive, correct? And then do you still foresee -- in the past, you've given some guidelines just about where you saw margins going to in a few years. Is that still what you're thinking right now?

Correct. Yes. Yes. No major updates to what we've shared, Cindy, in terms of the EBITDA progression that we expect in 2023, which we shared would be about 300 basis points of EBITDA margin improvement. We also shared on our last call a midterm -- kind of medium-term EBITDA target of -- in 2025 of 10% and then a long-term target of 20% plus. And so no major updates to that. We continue to have -- are encouraged by the progress we're making in 2022, but that will be a key focus for us as we finalize our plan for next year.

And just along those lines, we were encouraged to see that, in 2022, we're ahead of schedule with regards to cost reduction, and we will continue to make this a focus and certainly share more specific updates as it relates to this in our next earnings call for 2023.

Next, we have Jack Wallace with Guggenheim Securities.

Congrats on a really solid quarter. Just wanted to talk a little bit about some of those faster-to-burn, in-demand revenue opportunities you have with Population Health Suites, the tech-enabled outsourcing, Financial Empowerment Suites. Thinking about the top 50 clients that represented the majority of your revenue. How penetrated are those offerings inside of that base? And then what would be, if you could give us a loose number for, what the potential revenue opportunity is within those customers?

Yes, absolutely, Jack. So thank you for that question. I would say as it relates to the penetration within our top 50 or top 100 clients, our Financial Empowerment Suite is inclusive of a recent acquisition of Vitalware in the last two years and then a longer-standing solution that we've developed on the cost side with power costing and power labor. And both of those, though, are relatively recent elements in our portfolio. And so there's a great deal of opportunity for us to further penetrate the existing client installed base, even among our largest clients. And so a majority of those clients still have the opportunity for expansion opportunities and realizing the meaningful ROI from the Financial Empowerment Suite as well as our Pop Health suite. And so we're excited about that. And we're also focused with our existing clients, in particular, on enabling that cross-sell to be as easy as possible. And so as you may recall, in many cases, as our clients grow with us, so many of them choose to move more towards that all-access tech subscription, which has built in meaningful contractual escalators that are often in the double digits from a percentage growth perspective. And the way that they feel good about that is just the ability to add new modules like the Financial Empowerment Suite or the Pop Health suite that gives them even more value for that tech subscription. And so especially with our largest clients, that's likely the means of providing that satisfaction and providing that continued reliable tech expansion through the all-access subscription contracts. There are others of our clients, typically are smaller clients that are on more of a modular tech subscription where it's more of a step-up function of revenue opportunity, but more of our large clients are moving towards or have already moved towards that all-access subscription.

And then on the other component, the tech-enabled outsource side, I would just mention, Jack, again, there is ample opportunity with that offering as well in the analytics and chart abstraction side in terms of the upsell potential with our, call it, top 50, top 100 customers. .

This does conclude our Q&A session. And I would now like to turn the floor back over to Dan Burton for any additional or closing remarks.

Thank you all for your continued interest in Health Catalyst, and we look forward to future discussions. Take care.

Thank you, ladies and gentlemen. This does conclude today's Health Catalyst Third Quarter 2022 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.