Definitive Healthcare Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Definitive Healthcare provides healthcare commercial intelligence through a SaaS platform, with over 3,000 customers. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $59.2 | $50.1; up 18% |
| Gross profit / GAAP gross margin | $47.3 / 80% | $38.8 / 77% |
| Adjusted gross profit / margin | $49.8 / 84% | $44.1 / 88% |
| Operating loss | $(11.8) | $(11.0) |
| Net loss | $(15.6); $(0.11) per Class A share | $(13.1); $(0.09) per share |
| Adjusted EBITDA / margin | $15.7 / 26% | $14.0 / 28% |
| Cash from operating activities | $15.0 | $13.6 |
- Revenue mix: Subscription revenue was $58.5 million, approximately 99% of revenue; professional services contributed $0.7 million.
- Liquidity at March 31: Cash and cash equivalents of $125.0 million, short-term investments of $219.0 million, and $75.0 million available on the revolving facility. Current assets were $421.5 million versus current liabilities of $142.6 million.
- Debt: $264.7 million principal outstanding on the variable-rate term loan; no revolver borrowings. The loan matures in September 2026, with an approximately $220 million balloon payment at maturity. The effective interest rate was 6.66%.
- Cash movement: Cash and cash equivalents declined $22.0 million during the quarter. Investing cash outflow was $33.5 million, mainly reflecting net purchases of short-term investments; financing cash outflow was $3.5 million.
Material changes versus prior year
- Revenue grew $9.1 million, primarily from new customers and the Analytical Wizards acquisition; this was partly offset by a $0.4 million decrease from customers already present at the prior year-end.
- Operating expenses rose 19% to $59.1 million, including higher product development and general and administrative costs, equity compensation, and restructuring costs. Net loss attributable to Definitive Healthcare Corp. widened to $11.8 million from $8.6 million.
- Adjusted EBITDA increased, but its margin fell to 26% from 28%; adjusted gross margin declined to 84% from 88%.
- Interest expense increased amid higher rates. Other expense included a $3.6 million loss from remeasurement of the tax receivable agreement liability.
- Current remaining performance obligations declined to $180.9 million from $183.5 million at December 31, 2022; total remaining performance obligations were $265.8 million versus $277.0 million.
Outlook, commentary, risks and unusual items
- Management expects 2023 revenue growth to be lower than 2022. It cites longer sales cycles, stricter customer approvals, deferred purchasing decisions, and heightened churn, particularly in life sciences and provider markets. Management expects 2023 NDR to be slightly lower than year-end 2022 unless macroeconomic conditions improve; no specific NDR value is provided.
- Management expects gross margin to decrease modestly as additional third-party data sources increase data and hosting costs. It expects interest expense to rise on the unhedged portion of variable-rate debt.
- A restructuring plan announced in January aims to reduce costs and improve margins. Q1 restructuring charges were $2.1 million; a further $0.5 million of expense is expected through August 2023.
- Two interest-rate swaps hedge portions of debt through March 2025. Management estimated that a 1 percentage-point rate change, excluding swap effects, would change quarterly interest expense by approximately $0.7 million.
- The tax receivable agreement liability was $166.9 million at March 31. The agreement generally requires payment to covered holders of 85% of specified realized or deemed tax benefits; amounts and timing may vary, and certain events can accelerate obligations.
- Management believes cash, investments, operating cash flow, and revolver availability should cover liquidity needs for at least 12 months. It cautions that macroeconomic deterioration, financial institution stress, financing availability, and customer spending could adversely affect results and liquidity.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It stated ordinary-course legal matters are not expected to have a material adverse effect; no material risk-factor changes from the 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether customer churn, deal delays, and reduced purchasing translate into weaker NDR, cRPO, and revenue growth in subsequent filings.
- Whether operating costs and third-party data expenses are controlled sufficiently to stabilize margins, and how the restructuring affects results.
- Debt-rate exposure, covenant compliance, refinancing needs, and the capacity to address the 2026 balloon payment.
- The assumptions behind the $166.9 million TRA liability and the potential timing and amount of payments, particularly as LLC units are exchanged.
- How much reported and adjusted performance depends on equity compensation, amortization, restructuring, and other excluded items.