Definitive Healthcare - Q2 2024
August 5, 2024
Transcript
Operator (participant)
Welcome to Definitive Healthcare's Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to Matt. Please go ahead.
Speaker 11
Good afternoon, and thank you for joining us today to review Definitive Healthcare's financial results. Joining me on the call today are Kevin Coop, Chief Executive Officer, and Rick Booth, Chief Financial Officer. During this call, we will make forward-looking statements, including, but not limited to, statements related to our market and future performance and growth opportunities, the benefits of our healthcare commercial intelligence solutions, our competitive position, customer behaviors, and use of our solutions, our financial guidance, our planned investments, generating value for our customers and shareholders, and the anticipated impacts of global macroeconomic conditions on our business results and customers, and on the healthcare industry generally. Any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors sections and elsewhere in our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in the earnings release that we have just posted to the investor relations portion of our website. Additionally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release and investor presentation on the investor relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Kevin.
Kevin Coop (CEO)
Thanks, Matt, and thanks to all of you for joining us this afternoon to review Definitive Healthcare's second quarter 2024 financial results. Let me begin by saying I'm very excited and energized to be the new CEO of Definitive Healthcare, and I look forward to meeting with many of you in the days and weeks ahead. As you will hear on today's call, our performance was mixed in the second quarter. Our total revenue was $63.7 million, up 5% year-over-year and exceeding our guidance range. Adjusted EBITDA was $20.9 million, up 21% year-over-year and exceeding our guidance range. Adjusted EBITDA margin was 33%, up 450 basis points year-over-year, also exceeding our guidance range. In addition, we continued to drive improved renewal rates versus prior year.
Although these results highlight Definitive Healthcare's business model and commitment to profitability, we underperformed on our internal logo and upsell expectations, largely due to continued macro headwinds and sales execution challenges. These sales challenges caused us to revise our guidance for the remainder of the year, which is disappointing, but as I will address in my remarks, I believe that many of the operational fixes we need to make across the business can be done fairly quickly.
Before we dive into the details of last quarter's results, I will give some background on myself and what attracted me to Definitive Healthcare, provide my initial thoughts on what I've learned in my first 30 days on the job, outline at a high level the action plans we're putting into place to drive towards improving our operational and financial performance, and I will highlight some of our key wins from the second quarter. I'd like to start by framing initially, though, why I decided to join Definitive Healthcare. With 30 years of experience in driving business transformation at all levels of scale across many verticals, I was attracted to Definitive Healthcare and the combination of skill sets that this role requires, which also align with my own capabilities and interests.
One constant has always been a product-centric focus, always with the foundation and data, and a relentless adherence to commercially driven results. As part of the leadership team that took Dun & Bradstreet private, I was responsible for the global commercial transformation that returned the company to growth while also realizing substantial cost synergies, and ultimately was the P&L leader for North America as its president. At Black Knight, now part of ICE, the Intercontinental Exchange, I led the data and analytics businesses that returned that division to double-digit growth and profit and also allowed us to accelerate our return to the public markets with a very successful IPO. Prior to that, I led the data and solutions businesses for Verisk. In this role, I led the businesses to sustain profit and growth, which drove double-digit annual increases and expanding margins for a decade, ultimately supporting its very successful IPO.
Most recently, as CEO of DailyPay, a market-leading fintech in the worktech space, I led the team to accelerated growth, achieving profit goals ahead of schedule. In all of these roles, I developed a deep understanding of the power of data, the ability to identify root cause issues, translate those and identified needs into action, and perhaps most importantly, how do you build a high-performing, accountable, and efficient go-to-market engine? At the core, I'm a growth-oriented executive, a trait that I have nurtured and developed through years of commercial leadership. I am very proud to have had a direct impact on improving the growth and profitability performance of every business that I've been trusted to lead. As I assessed the opportunity at Definitive Healthcare, I had several specific things that I was looking for. First, a great team with deep domain expertise and a passion for serving customers.
Secondly, a growing and vibrant market that would provide ample opportunity for long-term sustainable growth. Third, a differentiated and compelling set of data and technology assets that can deliver great value to customers and benefit from a sustained competitive moat. And finally, a business that would benefit from a commercially focused leader. My extensive due diligence made it clear that Definitive Healthcare checked each of these boxes. And after being here for a month, I'm happy to say that I'm even more confident that this is a business with strong fundamentals, particularly its people and data assets. A few observations from my first month here. We believe our reference and affiliation data is a true differentiator. We have a robust and growing data set, and we are seeing good early traction with our enhanced data visualization tool in healthcare providers.
We have a great customer base that counts on Definitive Healthcare to improve their operational performance day in and day out. My initial customer conversations give me great confidence that we can add even more value, and I'm excited to meet directly with more of our customers, prospects, and key partners over the coming weeks. Our product and data science teams have deep domain expertise and are already positioned on a simplified roadmap and strategy that we believe is focused on the right problems with our best people and best talents. Overall, our bench of talent exceeded my expectations, with a good mix of long-tenured domain experts who deeply understand our customers and products, and seasoned managers who are experienced in scaling organizations.
Our core assets provide a tremendous foundation for improved growth and profitability for Definitive Healthcare going forward, and to build upon these strengths, we have spent the last month undergoing a process of ruthless self-reflection to identify the things we are doing well and the things that we need to improve. A part of that process, we needed to acknowledge that the business is not executing as well as it can. Positively, we believe there are things we can fix quickly that should enable us to deliver meaningful growth better over time. When demoing and talking to customers about our products and solutions, I'm incredibly impressed with the breadth and depth of our data assets and technology. In Q2, we launched Carevoyance, our new platform for the medtech industry, along with a new mobile app for our flagship View platform.
In addition, we continued to expand our datasets, recently adding management services organizations and independent practice associations to our PhysicianView dataset. We were also selected as the 2024 Databricks Healthcare and Life Sciences Partner of the Year, which is a testament to our focus on delivering innovative data and AI solutions to the healthcare and life sciences industries. So we have great data, and we are making great strides in delivering even more great products for our customers. What we are now focused on is simplifying and prioritizing our product roadmap. Our end-to-end solutions for life sciences, provider, and diversified industries reflect the company's internal innovation and robust acquisition strategy of the last several years that can be made more efficient and more customer-focused.
To streamline our development teams and to further our product innovation, the team is now focused on bringing these point solutions together into a more unified platform that is easier to use for our customers and solves a broader range of their most important business problems. In addition, we've put together a new product roadmap framework that will streamline decision-making for more targeted and efficient future product development decisions. This process will also ensure that we stay focused on the parts of the market where we believe we will be able to compete as a top-tier solution. So what are the things that we need to improve? At a high level, I would summarize it as simplification, both in go-to-market and product development. We've been doing too many things at the same time, and execution has suffered as a result.
This has led to inefficiencies and made it harder for us to deliver on our objectives than it needs to be. Let me give you a couple of examples. From a go-to-market standpoint, there's been a tremendous amount of change over the past six to nine months, and we have to simply acknowledge that it's been a mixed bag. I believe the high level approach outlined by the team last quarter, which includes devoting more resources to our most important enterprise customers while creating a separate sales motion for small and medium-sized customers, is the right framework. However, I firmly believe that we can do this more efficiently and effectively with some very straightforward changes. As we announced last week, Carrie Lazorchak has resigned her position as CRO to pursue other opportunities.
Given my extensive background leading commercial sales organizations and the current growth profile of the business, I will be directly overseeing the sales organization, with its senior leaders reporting directly to me. This will allow me to quickly and effectively enact required changes. For example, one of the key learnings we've identified so far is that our enterprise go-to-market efforts have become too complex. Given how the business has evolved, we often find ourselves selling point solutions rather than a unified platform. This has made our pricing and packaging more complicated than it needs to be, and it's made our demand generation and sales efforts less efficient and effective than they could be. Said another way, our go-to-market team is having success selling point solutions, but I believe we have an even greater opportunity to evolve towards a more of a platform sale.
Much of this can be addressed through a more simplified selling motion, which will be driven in part by our unified product vision. We also believe a simplified enterprise go-to-market motion will enable us to continue to improve churn by better serving our customers. By presenting a more unified platform and solution through a streamlined effort, we will be able to help our customers grow into solutions that meet more of their needs and fully unlock the entirety of our offering. In the SMB market, we will focus on strengthening our self-serve capabilities and developing a product-led growth motion to expand our reach in this part of the market. The good news is that many of these operational fixes that we need to make across the business can be done fairly quickly. We have already begun to operationalize many of them and continue to identify other areas for improvement.
Obviously, we're at the early stages of finalizing and executing on the near term challenges we will be making across the business, but I can tell you that there is a tremendous sense of excitement and urgency amongst everybody at Definitive to operationalize these changes and drive improvements as quickly as possible. So while we believe the future is very bright for Definitive Healthcare, we did have a very challenging quarter in Q2. Elongated sales cycles, a heightened sense of scrutiny on spending remains prevalent for many customers and prospects, particularly in the life sciences market. Challenging market conditions are what they are, but we are dedicated to ensuring that they will not prevent us from delivering better operational results going forward. We are confident that as we execute the strategy I laid out above and bring stability to our go-to-market team, we can return this company to consistent growth.
I'd now like to highlight a few key customer wins from Q2 that demonstrate the growth opportunity we have. An AI software provider of personalized screening and early detection breast cancer needed to understand a complex network relationship, clinical volume by provider and place of service, and executive contact hierarchies. Through integration of our claims data and proprietary reference and affiliation data, Definitive Healthcare will serve as the foundation for their market intelligence and commercial strategy planning functions. Next up, one of the largest U.S. providers of electronic medical records systems recently expanded their relationship with Definitive Healthcare. Since 2017, their sales organization has relied on Definitive Healthcare's View Suite of products for competitive intelligence, hospital technology, install analysis, and white space identification.
After they were acquired by a larger multinational software company, the newly formed go-to-market organization has expanded their use of our data for their marketing programs in addition to sales. Their marketing team selected Definitive Healthcare for our in-depth affiliation data, account data granularity, and ease of use of our online portal. Another win for us in the medtech space is the cardiovascular division of one of the largest providers of diagnostics, medical devices, and pharmaceuticals. They recently selected our Carevoyance platform for their marketing and field sales teams to understand patient movement for cardiovascular procedures within specific territories, and to support their competitive displacement initiatives focused on the beginning stages of the physician referral funnel. A large health system on the West Coast selected Definitive Healthcare to provide insights into their market opportunity at the service line level, including neurology, cardiology, oncology, orthopedic, and maternal child health.
This analysis will allow them to allocate resources more efficiently, increase referrals, and reduce outmigration. Finally, the healthcare and life sciences field sales teams of one of the world's largest software companies will be leveraging our HospitalView and ImagingView data to target hospitals, health systems, imaging centers that utilize Epic Systems and EHR platforms. After the initial rollout to their field teams, they plan to expand their use case into additional facilities types. Before I turn the call over to Rick, let me wrap up by saying I couldn't be more excited about Definitive's future. The first 30 days only served to confirm my enthusiasm before joining. The team has built a great business and a truly differentiated technology that can solve some of our customers' most important operational needs.
I believe we're in a great position to build upon that foundation to deliver even more value for our customers and return to the financial performance our shareholders expect. With that, let me turn the call over to Rick to walk you through the numbers. Rick?
Rick Booth (CFO)
Thanks, Kevin. I'll start by reviewing our Q2 results in detail, then finish with our guidance for Q3 and for the full year 2024. In all my remarks, I will be discussing our results on a Non-GAAP basis, unless otherwise noted. As Kevin mentioned, we're pleased with the second quarter revenue and profit results, but faced sales execution issues late in the quarter, leaving us well short of our internal bookings expectations. While the booking shortfall did not impact on Q2 results, it did impact our view of Q3 and the full year, which I'll discuss at the end of my remarks. In Q2, we were pleased to deliver revenue and adjusted EBITDA above the high end of our guided range. We remain focused on what we can control and continue to advance our efforts to operate more efficiently while delivering innovation for clients.
Both these efforts are expected to position us well as the market recovers and growth improves. Financial highlights of the second quarter include revenue growth of 5% compared to Q2 2023, and we grew adjusted EBITDA, adjusted net income, and non-GAAP earnings per share by 21%, 14%, and 13%, respectively, over the same period. We delivered a 33% adjusted EBITDA margin for the quarter, up over 450 basis points year-over-year. As a result, our Q2 revenue growth, plus the trailing twelve-month adjusted EBITDA margin, was 36%, and we generated $21.5 million of unlevered free cash flow in the quarter, and $78.6 million on a trailing twelve-month basis, which is up 50% versus the twelve months prior.
Turning to our results in more detail, revenue for the second quarter was $63.7 million, up 5% from the prior year and above the high end of our guided range. This includes $1.7 million of professional services revenue as large clients engaged us to work on some of their most challenging issues. In a small note, as part of the strategy to allocate more of our sales resources to enterprise customers, as we described in our last call. During the second quarter, we completed a project to refresh our customer hierarchies to reflect industry consolidation. At the same time, we normalized prior periods to reflect the same changes. In some cases, this moved existing customer entities under larger parent accounts and therefore reduced our total client count, while ARR was unaffected.
To provide investors with transparency to the impacts, the adjusted counts for 2023 and 2024 are disclosed in the 10-Q filed today, and on this call, we will reference these adjusted counts normalized for the updated mapping in discussing the following quarter-over-quarter and year-over-year changes. We ended the quarter with 537 enterprise customers, which we define as customers with more than $100,000 per year in ARR. This was an increase of 32 enterprise customers, or 6% year-over-year, and a decrease of 4 customers quarter-over-quarter as adjusted. As a reminder, these customers represent roughly 2/3 of our ARR and are a key focus of our go-to-market programs.
Our total customer count, which includes smaller customers, was approximately 2,600 at the end of Q2, down about 200 from Q2 2023, and down 100 from the previous quarter, as current conditions have disproportionately impacted smaller customers. Adjusted gross profit margin of $53.1 million was up 1% from Q2 2023, and as a percentage of revenue, the adjusted gross profit margin of 83.4% decreased approximately 260 basis points from Q2 2023, due to the impact of Populi, which was acquired in Q3 2023. Note that while Populi reduces gross margin in the short term, we expect it to benefit from operating leverage as it scales, and we believe it will operate at comparable gross margins to Definitive in the long term.
Sales and marketing expense of $19.8 million was down 9% from Q2 of 2023. As a percentage of revenue, sales and marketing expense was 31.1% of revenue, an improvement of nearly 450 basis points from Q2 2023. The year-over-year improvement reflects the changes we've made to drive efficiencies in sales and marketing by focusing on the markets and activities with the highest return on investment. And based on our current full year revenue outlook, which I'll get to in a few minutes, we now expect to see operating leverage from sales and marketing in 2024 of approximately 200 basis points relative to 2023. Product development expense was $6.9 million, down 1% from Q2 2023.
As a percentage of revenue, product development was 10.8% of revenue, consistent with Q2 2023. We believe investing in our platform and using our existing datasets to launch or enhance multiple products is a highly effective and efficient way for us to increase the value we deliver to customers. Kevin touched on some examples of these earlier, and we'll continue to invest in the highest ROI opportunities we have identified on our long-term product roadmap. We continue to expect full year 2024 product development expense as a percentage of revenue to be fairly consistent with the full year 2023. G&A expense was $6.5 million, down 11% from Q2 2023.
As a percentage of revenue, G&A expenses were 10.3% of revenue, which is an improvement of over 150 basis points compared to Q2 2023. We expect G&A expense as a percentage of revenue in 2024 to improve 50 to 100 basis points year-over-year. Adjusted operating income of $19.3 million was up 21% from Q2 2023, and as a percentage of revenue, operating income was 30% of revenue, up over 400 basis points from Q2 2023. The year-over-year margin increase was primarily due to spending efficiencies in sales and marketing. Adjusted EBITDA was $20.9 million, a 21% increase from Q2 2023.
As a percentage of revenue, adjusted EBITDA was 33% of revenue, up over 450 basis points from Q2 2023. For the full year 2024, we continue to expect to see a year-over-year improvement in our adjusted EBITDA margin. We'll continue to make investments in the areas that are most important to us and our clients and maintain a balanced financial profile that drives profit margin expansion. Adjusted net income was $14.2 million, or $0.09 per diluted share, based on 156.9 million weighted average shares outstanding. Turning to cash flow, Definitive Healthcare's high margins, upfront billing, and low CapEx requirements provide substantial free cash flow generation. We focus on trailing 12 month cash flows due to seasonality. Operating cash flows were $44.8 million on a trailing 12 month basis.
Up 34% from $33.5 million in the comparable period a year ago. Unlevered free cash flow was $21.5 million in the quarter. On a trailing 12 month basis, unlevered free cash flow was $78.6 million, up 50% from the comparable period a year ago. Unlevered free cash flow was 30% of revenue on a TTM basis, equivalent to 95% of our TTM adjusted EBITDA of $82.5 million. As announced on the last earnings call, on May 1st, the board authorized the repurchase of up to $20 million of our stock. We expect the repurchase program to continue through the end of 2024.
Within the second quarter, we've repurchased approximately 1.3 million shares at an average price per share of $5.54, for a total of $7 million. The buyback authorization and our implementation of it reflect our strong cash flow generation, our confidence in the business's long-term prospects, and our commitment to enhancing shareholder value. At this time, we expect to continue to be active in the market in the third and fourth quarter of 2024, but as always, any repurchase program is subject to other ongoing relevant considerations, including market conditions. On the balance sheet, we ended the quarter with over $296 million of cash and short-term investments. With strong adjusted EBITDA profitability and only $251 million of debt, we believe we are well positioned to fund both organic and inorganic growth initiatives.
Current remaining performance obligations of $171 million were down 3% year-over-year as reported, but flat year-over-year when adjusting for contracts that are excluded from CRPO due to opt-out clauses. Total remaining performance obligations were down 2% year-over-year, and deferred revenue of $97.1 million was down 0.6% year-over-year. After quarter end, we undertook an assessment of our equity's book value versus our stock's market value, and that review identified a $363.6 million goodwill impairment as of June thirtieth. That write-down also generated approximately $40 million of gain on the remeasurement of the TRA liability and a $22 million deferred income tax benefit. As a reminder, these are non-cash accounting charges.
They have no impact on our debt covenants, and all impacts are excluded from our adjusted earnings. As Kevin discussed, we continue to experience macro headwinds and sales execution challenges, and we're adjusting our guidance accordingly. We believe this revised guidance fully contemplates the year-to-date performance, current conditions, and potential short-term disruption from the recent organizational change. For Q3, we now expect total revenue of $61 million to $62.5 million, resulting in a revenue decline of 4% to 7% year-over-year when compared to Q3 2023. This reflects both the wrap on the Populi acquisition and our first half bookings performance. Within total revenue, we expect subscription revenue to be down low single digits, with a more significant year-over-year decline in professional services revenue.
From a profitability perspective, we expect adjusted operating income of $16 million to $17.5 million, adjusted EBITDA of $17.5 million to $19 million, or a 28% to 31% adjusted EBITDA margin in Q3, and adjusted net income of $12 million to $13 million, or $.07 to $.08 per diluted share on a $156.5 million weighted average shares outstanding. Rolling forward to the full year 2024, we now expect revenue of $247 million to $251 million, ranging from 2% decline to approximately flat year-over-year. From a profitability perspective, we're tightly managing operating efficiency and the associated costs to protect margin expansion for the year.
Accordingly, we now expect adjusted operating income of $67 million to $71 million, adjusted EBITDA of $74 million to $77 million for a full year margin of 30% to 31%. I'd like to reiterate, despite the top-line pressures, we remain committed to profitability and expect 50 to 100 basis points of margin expansion from full year 2023 results. Adjusted net income is expected to be between $50 million and $53 million, and earnings per share are expected to be $0.32 to $0.34 on a $156.8 million weighted average shares outstanding. So in conclusion, we're pleased to have delivered revenue and adjusted EBITDA above the top end of our guidance for the quarter... and to have delivered double-digit growth in adjusted EBITDA, adjusted net income, and non-GAAP earnings per share, while getting on track with our buyback program.
We believe our revised guidance fully contemplates year-to-date performance, current conditions, and potential short-term disruptions from recent organizational changes. We remain confident that we're well positioned for the long term in a large and attractive market that we believe will help us drive shareholder value for a long time to come. With that, I'll hand it back to Kevin for a few closing thoughts before we take questions.
Kevin Coop (CEO)
Before I open it up to questions, I want to frame for investors how we think about judging the success of our strategy. We recognize that the changes we have discussed today will take some time and will require some patience from investors. So let me be clear what we are focusing on achieving. We believe Definitive Healthcare is a growth company, and that we can return double-digit revenue growth. It will take some time for us to deliver on that goal, but the opportunity is clearly there. We are also committed to delivering high levels of non-GAAP profitability and continued operating efficiency. Given the highly scalable nature of our business model, we believe that the most effective way to drive durable margin expansion is through faster growth.
So we will continue to invest in the most important areas to our clients and maintain a balanced financial profile that drives long-term profit margin expansion. Finally, knowing that no company needs to do everything itself, we plan to expand the reach of our partnership and inorganic growth strategies. We look forward to updating you on our progress on future earnings calls, and with that, I'd like to open it up for questions.
Operator (participant)
If you would like to ask a question, please press star one on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted, and please keep to one question and one follow-up question. Once again, if you have a question, please press star one on your phone now. Our first question today will come from Saket Kalia with Barclays.
Saket Kalia (Managing Director and a Senior Equity Research Analyst)
Okay, great. Hey, guys. Thanks for taking my questions here, and welcome, Kevin. Well, you know, really look forward to working with you.
Kevin Coop (CEO)
Thank you. It's good to be here.
Saket Kalia (Managing Director and a Senior Equity Research Analyst)
Kevin, maybe, maybe just to start with you. You know, your prepared remarks, I thought were, were really helpful in, in sort of framing where you'd like to go with, with the go-to-market organization. And, and of course, you're, you're just one month into the role, right? So this might be a little bit of an unfair question, but maybe you could just double-click on, on how you envision shifting to more of a platform sale and, and just maybe even higher level. What does a platform sale look like to a, to a Definitive customer? Does that make sense?
Kevin Coop (CEO)
Yeah, I think so. You know, I think first, the way I look at the situation is it's really one of continuity, right? So a lot of stuff was started here prior to my arrival, meaning the organization reorganization, and it was a rather large and complex one, and obviously, that's gonna take some time. And there are areas that there was probably more impact than we had anticipated. But recognizing the situation, it's familiar to me. It's what I signed up for. Frankly, it's what I sought; we've got a quality asset, large strategic, valuable segment, and things were already underway.
And so when we think about moving from more of a point solution to a platform, what that really means is with a flatter GTM, with a more simplified approach that's more efficient and effective, and you start to stitch together the products that today are still, for the most part, often sold as individual point solutions, you're starting to sell those products through a much more unified go-to-market, and it's what the product organization is already doing. So this is something that was started prior to my arrival. Saket, where you've got a much more simplified roadmap that is taking what was, it was significantly larger in number of things that were going on that were just very difficult to execute on concurrently.
By focusing on fewer things, interoperability, a common UI, UX, the ability for our customers to access more solutions through a single simplified interface, it makes it easier to sell. It makes it easier for our customers to consume, and ultimately, that affects your renewal rate and will start to help with areas, churn and others that we're focused on.
Saket Kalia (Managing Director and a Senior Equity Research Analyst)
That, that makes a lot of sense. And, and maybe just on, on that point, maybe that's a, a good dovetail into my follow-up question for you, Rick. Could you just talk about how net revenue retention might sort of trend through the rest of this year, even, even anecdotally? You know, I think what we said in prior calls is that we're starting to lap some of the periods of, of higher churn, and, and you correct me there if I'm wrong, but when does that sort of translate into, into maybe some improvement in that, in that overall NRR metric?
Rick Booth (CFO)
Thank you, Saket. We still have half the year to go. Q4 is typically our largest bookings quarter. So what we're really focused on is progressing those second-half opportunities. We are not reiterating our NDR guidance today because of the slow start to first half bookings, particularly the late Q2 shortfall, and our current guidance scenario does not depend on NDR improving year-over-year, but it's too soon to put a finer point on it.
Saket Kalia (Managing Director and a Senior Equity Research Analyst)
That's very helpful. Thanks, guys.
Operator (participant)
Our next question will come from Craig Hettenbach with Morgan Stanley.
Craig Hettenbach (Equity Analyst and Managing Director)
Thank you. Question for Kevin, and appreciate all the context in your prepared remarks. You know, understanding that there's gonna be some patience required as you retool here, what are some of the things you would point to in terms of proof points that, you know, over the next couple quarters, you'd be hoping that you can share with the investment community in terms of progress on the turnaround?
Kevin Coop (CEO)
Yeah. So I think part of this is, you've really gotta be disciplined in your focus on root cause, right? Root cause analysis. And, you know, the good news is, I think for us, is that when we look at the market in general, and you look at the segments that we service, you've got basically, an increasing focus of customers on ROI. You've got some goodness in areas like, you know, frankly, diversified is showing a point of relative strength. We've got provider, where our data visualization and extension of Populi into that segment, it's really helping our renewals. Carevoyance is in line with expectations for the year, and we've got biopharma, which is still challenged.
And so as you start to really look at this in a more simplified focus, you know, you're it's the metrics we already talk about with you, right? It's just you're gonna be able to see, hopefully, some very quick uptick as we look at, you know, what I would call kind of low-hanging fruit with the simplification process around where do we have our right to win, the prioritization around our segmentation strategy, the fact that we've had a a change in our go-to-market, while that wasn't expected, you know, the upshot of that is it's allowing me to take a more directive hand in getting closer to the customer with more customer intimacy. I'm seeing customers.
I'm going out with the sales organization, and you can really very quickly start to determine where and what we need to, whether it's pricing and packaging, whether it's different sales motions, or how we're actually taking products to market. And that's what I've got a lot of experience in, and that's what I'm focused on doing so that we can show when we talk to you in the next quarter, we're hoping to have a significantly different story that we'll be able to start talking about, and it'll make it a much more enjoyable conversation.
Craig Hettenbach (Equity Analyst and Managing Director)
Got it. Then just a follow-up for Rick. Understanding there was a lot of work done early in the year in terms of reorg and taking costs down, which have helped margins this year. Given the lower run rate for the back half of the year, are you doing anything around the edges in terms of cost and how you're thinking about that today and as you segue into next year?
Rick Booth (CFO)
Thanks for acknowledging. We're proud and pleased with our revised lower run rate cost structure. You know, we did manage to expand EBITDA margin by a full 450 points year-over-year. We feel good about that as a baseline, and of course, we continue to manage costs prudently. But we are not planning any new incremental RIFs or other actions of that type.
Craig Hettenbach (Equity Analyst and Managing Director)
Got it. Thank you.
Operator (participant)
Our next question will come from Joe Vruwink with Baird.
Joe Vruwink (Senior Research Analyst and Managing Director)
Great. Hi, everyone. Kevin, thanks for all the detail around the go-to-market strategy. When you think about moving away from point solution focus, taking a more platform approach to selling, would you characterize that as macro agnostic, just in the sense that it's ultimately better for customers in all ways, the capability they get to consume at once probably makes deal closing likelier, and that's the two-sided benefit? So that's my macro agnostic comment. Or do you think this action is maybe aimed or better suited for an improving macro, and so DH gets leverage on the upside when things do start to come through in a better way?
Kevin Coop (CEO)
Yeah, I mean, it's an interesting question. I mean, for sure, I think that an improving macro market environment will help no matter what, right? It will get better. If the market improves, then everybody ought to improve, right? It's just sort of natural. But the reality of whether or not the sales cycles are elongating, whether you have more stringent approval processes, people are deferring decisions, and maybe there's a heightened focus on ROI, especially in some segments which we can't control. I kind of look at that independent of what we need to be able to do to grow, because that's not really. You're not gonna hear a lot of that emphasis on this call.
Maybe you've heard more of that in the past, and that despite whatever the macro, challenges are, we have a lot of goodness, and we need to reinforce more on what's working and less on what isn't working. And so I look at this as we need to grow, and we will grow, regardless of the macro environment. And if the macro market turns more favorable, that's only gonna help us, for sure.
Joe Vruwink (Senior Research Analyst and Managing Director)
Okay. That's a great answer. And then I just wanna be clear of my understanding on where the sales disruptions occurred. If I look at enterprise accounts that grew, you know, if I calculate ARR per total account, it looks like that value grew. So I'm wondering, was it more in the total customer logo churn and maybe that small and medium exposed where you undershot expectations? Just trying to reconcile what happened towards the end of the quarter.
Kevin Coop (CEO)
Yeah, I think it's a couple things, right? So first of all, we didn't just have one big disruption. It happened at a couple of times, right? So number one, you've sort of, you know, you've exacerbated it by creating trauma over a longer period. You know, balanced growth is always the key, right? You need to have an eye on profitability all the time. But when you have the majority of a restructuring, the way we did it, where we eliminated a lot of overlay resources, we minimized a lot of spans and layers. We looked for efficiencies in areas, and sometimes those were actually well thought through, and I think they're great. We're gonna do more of it. In other areas, and without getting into the detail, they probably didn't have the impact that we thought.
We're gonna have to probably re-evaluate those decisions. But for example, we have more quota-carrying enterprise reps than we did prior. That was offset slightly at the lower end of the market, but that does align our teams with the biggest market opportunity. But through that reorganization, you know, you have, with books of business being moved around, you've got sales reps being reallocated into different markets. You know, from the outside and on a PowerPoint, it probably looks like it's gonna be particularly efficient, but when you have people, you know, sales teams are complex, adaptive systems, just like a technology infrastructure. And you know, the people dynamic sometimes gets affected in ways that aren't calculated, probably completely.
And so, you know, while that's where I started off by saying some of the things that we did, I think were actually really- we're seeing some real green shoots and productivity. In other areas, we need to address it pretty quickly. And so that's coming back to my initial comment about, you know, it's as simple as it is. You've got a flattened GTM with more customer intimacy and focus. We start to focus on more efficiency and effectiveness, and you've got this notion around bringing things more towards a, quote, unquote, "platform" as opposed to a point solution through the way we entitle our deals, contract for the deals, the product team, the way they're building them to bring them to market, and ultimately, the compensation structure that we paid our enterprise sales team.
You know, it starts to show some immediate returns, and that's where I think, you know, I'm hoping that we will be able to do this in a way. Not hoping, what I expect is that we will have a very different story here in about 90 days, to be able to start to show some proof points on how that's starting to impact the business.
Joe Vruwink (Senior Research Analyst and Managing Director)
Okay. Great. Thank you very much.
Operator (participant)
We'll move next to David Grossman with Stifel.
David Grossman (Managing Director and Senior Equity Research Analyst)
Thank you. Kevin, thanks. You've given us a great sense of operationally your sense for the business and these changes that you want to make. And if I think back, just maybe at a higher level, you know, the company went public, you know, during a healthcare bubble, really, and now we've got the exact opposite, more of a healthcare recession. So as you think about this, you know, and the strategic changes that you've undertaken, perhaps you could relate that to the shift in the value proposition for the industry going forward, because the environment is so much different today and probably be so much different tomorrow, vis-à-vis what it may have been two or three years ago.
Kevin Coop (CEO)
Yeah, so you know, we have a situation where. And it's not just isolated to healthcare, right? You have a, with the technology improvements that are happening at such an accelerated rate these days, the proof points that you may have two years ago are gonna change, and there's no difference in the segment that we compete in. So we have, you know, as great as we believe we are and as good-looking and fantastic, we have competitors that are not standing still either, and we've got more of them. And, you know, that's actually, I think, in a way, it's actually very healthy because it starts to spur a sense of urgency around what, you know, was the original value proposition for the IPO. A lot of that still remains constant today. We have fantastic data.
We've got truly differentiated data, especially as it relates to our reference and affiliation data. We are enhancing that with better data visualization to make it a more easy-to-consume solution to our customers, which is underway, with a simplified product roadmap that's bringing more urgency and acceleration to it. So I kinda look at that as actually, David, you know, we've got into a market now where even though you have a great team, tenured leaders, great domain expertise, we've got accountability that we're driving into the organization. The fact that the market is a bit challenged here is, you know, necessity breeds innovation, and it's really rallied the team and the folks that I was very pleasantly surprised today, even more than when coming in, are really focusing on our biggest challenges with our best customers.
And so, you know, I'd love to be in a market where you don't have any competitors and people aren't innovating, but that's hard to find. So I think in this case, it's actually gonna benefit us.
David Grossman (Managing Director and Senior Equity Research Analyst)
Right. All right, well, thank you for that. Rick, I have a quick question just about the implied guide for the fourth quarter. It looks like both revenue and margin is expected to be down sequentially. Is there some dynamic at play there, or maybe you could just give us a little bit more color, if my math is right?
Rick Booth (CFO)
Your math is right, David, and the dynamic that's in play is we anniversary in the third quarter, the anniversary of Populi. And as we've assessed the potential impact of the sales reorg and other factors, we have removed any assumption of improvements in our in our churn rate, and we're not assuming an increase in the close rate on pipeline. So those two things together result in the sequential decline that you're seeing. That sequential decline is greater in professional services throughout the second half than it is in subscription. Yeah, so, pro services is a smaller number, but we just wanna be clear in terms of what we're seeing.
David Grossman (Managing Director and Senior Equity Research Analyst)
Just to be clear, Populi, how does that impact the sequential dynamic? Wouldn't that be a year-over-year dynamic, or?
Rick Booth (CFO)
Sorry, that set us up going into, Sorry, I thought you were asking about the year-over-year revenue decline. So we're down 7% year-over-year in the second half. Okay. No, the impact of the sequential revenue is more conservative bookings assumptions and, assuming no improvement in churn.
David Grossman (Managing Director and Senior Equity Research Analyst)
Got it. Okay, very good. Thank you.
Kevin Coop (CEO)
Thank you.
Operator (participant)
Our next question will come from Ryan MacDonald with Needham & Company.
Ryan MacDonald (Managing Director and Senior Equity Research Analyst)
Hey, this is Matt Shea on for Ryan. Thanks for taking the question, and appreciate all the color on the internal changes. But maybe thinking about external, could you just expand on the incremental deal scrutiny you are seeing or any changes to call out? And I know price sensitivity has been an issue in the past, so curious if pricing changes are potentially on the table, or if sales cycle improvement really just revolves around moving towards a more packaged sale that'll help better communicate that ROI.
Kevin Coop (CEO)
Yeah, I wouldn't say that that's, you know, 30 days into this. And I'm sorry, is this from, is this Matt or for Matt?
Ryan MacDonald (Managing Director and Senior Equity Research Analyst)
This is Matt. I'm for Ryan MacDonald.
Kevin Coop (CEO)
Oh, yeah, Matt. So Matt, I, I wouldn't say that there's a pricing and packaging plan, but I can tell you that as we're evaluating different. And, and it, and it varies by, by solution to solution. You have to always be aware of the market dynamics of what the market, you know, the, the demand curve and what your supply cost is. And so we're looking at that to, to fundamentally understand. It goes back to my kind of root cause, you know, comment earlier.
If you're seeing longer sales cycles and the approval process is increasing, and with some of the additional scrutiny, you know, because there has, not related to, to Definitive, but other companies in the market that have had some data issues, and there's been increasing, you know, compliance and other regulatory scrutiny for whatever reason, you know, you have to be thinking about, well, what does that do to your, to your pricing strategy, right? You've got price elasticity, and your customer segmentation is two core components of your product strategy. So, you know, I'm not trying to, to dodge the question, but that's something I look at as just basically product 101. You've got to constantly be reevaluating the market dynamics of what's happening, including what the demand curve might be for the supply that you, that you're offering.
We're gonna continue to evaluate that, not just now, but in the future.
Ryan MacDonald (Managing Director and Senior Equity Research Analyst)
Fair enough. Yeah, probably jumping the gun on asking you this early. So maybe just shifting over to the product roadmap. Was wondering, you know, given the simplification, if you could just provide an update on Populi. Are you still planning on rolling this out to other end markets in the second half of the year? And should we expect any pipeline lift from that, or just where does Populi stand right now in your R&D priorities?
Kevin Coop (CEO)
Yeah, I think it's very important. I mean, we've got that's being integrated into the entire product roadmap. We have the team that's been. You know, from my perspective, coming in, having been involved in many acquisitions and integrations, I think that's a really standout way that it was done. The teams are blended. We've got leadership that we took best of breed from two different companies, and they've really embraced the Definitive brand, and we're seeing that as a major data visualization component that's being pushed through to all of our end users.
Ryan MacDonald (Managing Director and Senior Equity Research Analyst)
Thanks, guys.
Operator (participant)
We'll move next to Allen Lutz with Bank of America.
Allen Lutz (Director in US Equity Research)
Hi, this is Hannah Lee on for Allen Lutz. Thanks for taking the question. Just was wondering if you can talk about what you've been seeing in terms of the M&A environment and if you expect any changes around your M&A priorities?
Kevin Coop (CEO)
Well, I think, you know, to be, you know, any well-run operation, you're gonna constantly be looking at this from a concept... You need a concept of time. You need to look at everything you're doing in a build, buy, or partner manner. I don't think that Definitive historically has probably really leveraged the partnership aspect or angle as much as we can. So that is something that even in 30 days, we've really started to ramp up to look at how we can go faster with a greater sense of urgency. And I think there's gonna be a lot of opportunity out there. You know, I think that Definitive is in pretty good shape, and Rick can comment on that, but our... I think our capital structure is great. The board is super supportive, and it's a fantastic board of directors.
You know, we're gonna evaluate those as part of a, you know, kind of a multipronged growth strategy, opportunistically, and I think there's gonna be a lot of opportunity that is gonna show itself to us.
Allen Lutz (Director in US Equity Research)
Great. That's helpful. Thank you.
Operator (participant)
Our next question will come from Brian Peterson with Raymond James.
Brian Peterson (Managing Director)
Hi, thanks for taking the question. This is John on for Brian. Maybe just to double-click on the longer sales cycle commentary, any commonality you're seeing there, any specific geos you'd call out or, or segments where you're seeing the longer sales cycle, or is it just broad-based? And then I have a quick follow-up.
Kevin Coop (CEO)
You know, it's, it's 30 days in, so I don't know if I can really give you a definitive, but looking at the data, it does appear to be pretty broad-based, which, which does indicate that it's probably more of just kind of a macro in general, as opposed to a segment issue. But, you know, I think we probably need to take that and come back with a little bit more, with a little bit more sense of analysis, unless Rick, you think you can add?
Rick Booth (CFO)
That's exactly right, Kevin. Yep.
Brian Peterson (Managing Director)
Okay, perfect. Thanks. And maybe just following up with Rick here on the net retention, how would you maybe stack rank the drivers of the net downsell? Is it primarily a function of biotech combining CC operations, competitive pressures, or is it just downsizing of sales and marketing spend in the enterprise? Just curious to get more color there.
Kevin Coop (CEO)
Yeah. So we saw more pressure on the upsell, and more delays, but not but not outright losses on new sales. And so as a result, the churn, although it did improve year-over-year, at an overall level, the impacts were fairly similar, with a little bit more of an impact on churn in biopharma. Life sciences continues to be—sorry, I meant life sciences, not biopharma. But life sciences continues to have a relatively elevated churn rate compared to what we were seeing in 2022.
Brian Peterson (Managing Director)
Thank you very much.
Operator (participant)
Our next question comes from Jared Haase with William—excuse me, William Blair.
Jared Haase (Equity Research Analyst)
Yeah, good afternoon, and thanks for taking the questions. I wanted to ask maybe a clarification. So the shift from point solution to platform and kind of the change in that selling process, I know there's a lot of focus on being more efficient with sales, but with moving to that platform approach, do you expect that to ultimately lead to sort of longer sales cycles on average because it's a larger and, you know, more complicated sale? Now, I'm wondering if that would almost create, like, sort of an air pocket as you're kind of looking to move back to growth, but if clients need more time to kind of get the buy-in because it's a larger and, you know, larger budget allocation or just a more complicated decision criteria.
Brian Peterson (Managing Director)
Yeah, my experience has not been the case, but I think part of it's in devil's in the detail, right? So if you're talking about more of a complex, multi-product sale that has multiple buying personas, that might be. But if you're selling more products to the same personas, that's probably not the case. And even if, take for argument's sake, that it did slightly elongate the sales cycle, more products per customer is very easy to draw a correlation to improved renewal rates, and you will have better value per customer over time. And there's a lot of goodness. Your NPI is gonna. Your, your NPS score is gonna go up. I mean, there's just a lot of goodness that comes from that.
And so, I, you know, wish I, you know, it's that I had a proof point to tell you this here, but my experience of doing this for 30 years is, it is not more difficult to sell more than one product. In fact, it's easier, and it also provides a way for you to go back to your existing customers who are happy and to sell them more products and upsell them over time.
Jared Haase (Equity Research Analyst)
Yeah, that, that makes sense. I think the, the emphasis on ROI should be easier, or at least theoretically, should be easier to make that clear with, with kind of an enterprise or multi-product approach. So appreciate that. Maybe just as a quick follow-up, Kevin, for you, kind of stepping into the role here, would be curious to hear your thoughts just on corporate culture in, in general, kind of from a high level. Obviously, a lot of moving parts, a lot of, areas or opportunities for improvement that you've detailed here. Just as you kind of work through that, how do you kind of maintain culture and morale and all of that sort of thing in order to keep everyone, you know, aligned and, and moving in the right direction?
Kevin Coop (CEO)
Yeah, I mean, it's always a great question because it's the secret sauce that if you don't get that right, right, things start to deteriorate pretty rapidly. And I think that the reality here is Definitive, and it was, it's a testimony to, you know, Jason Krantz and his original, you know, vision behind what he's built a great business, is you've got a very team and family approach, but it isn't just that people are that get along and have that sort of chemistry. You've also got a very tenured and domain, you've got a lot of tenured domain experts that go through the organization. Like, we have people, many people that are very critical, that have been here for eight years, 10 years, right? So even as a relatively young company, we have very, very tenured people.
Part of my challenge was to basically, it's on me, to be able to, to create and continue that culture to where people want to stay and be part of the team as we start to evolve into a much more hyper-growth company, which has, you know, more expectations on performance, as well as continuing to build products and what was at one point, maybe a little bit of an easier macro environment. I think that the opportunity here for us is, you've got to retain that corporate memory and those domain experts, and you need to bring in and leaven into it some external folks that are going to augment the team in a way that it doesn't change what is ultimately the very- you know, we have a lot of goodness here that I- we don't want to lose.
And so that's one of the reasons that I joined, is through very extensive conversations with the board and, you know, not only the founder, but many of the executives here, is I think we have that kind of like-minded approach of we're, we're gonna build something great, and we have a great foundation. And now, this, the question is, you've got to kind of redouble your effort on kind of the organizational design, getting a couple extra people that are secret sauce on the boat, and then everybody needs to start rowing in the same direction.
And I'm gonna come back to this, because I think that while it's simple, it's really critical here, is you have to just have a very simplified, balanced approach, fewer things that are done well, that you can measure and that you can report on and add to it. And simplifying is actually more difficult than expanding, right? And so that first 30 days was really spending a lot of time on that, and I'm very comfortable that we've got the right people now on the right problems, and we've got the right focus, and we're gonna start to see some acceleration.
Operator (participant)
That concludes our question and answer session. I'd like to turn the conference over to Mr. Coop for his closing remarks.
Kevin Coop (CEO)
Yeah, just wanna thank everybody for their time today. It was a pleasure talking to talking to you, and I'm looking forward to future conversations. And, that's, that concludes our time together today. Thank you.
Operator (participant)
This concludes today's conference call. Thank you for attending. The host has ended this call. Goodbye.