Definitive Healthcare Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial amounts below are in millions of dollars unless stated otherwise. The company provides healthcare commercial intelligence through a subscription SaaS platform. It reported more than 2,700 customers at quarter-end; subscriptions generated approximately 99% of revenue for the first nine months.
Business context and comparability
The company completed its IPO and reorganization on September 17, 2021, raising $452.8 million in net proceeds after underwriting discounts and commissions. The reorganization made Definitive Healthcare Corp. the public holding company for Definitive OpCo, with legacy members retaining a noncontrolling interest. Most year-to-date results reflect Definitive OpCo; public-company results and Class A earnings per share apply only from the reorganization. Accordingly, reported loss attributable to the public company is not directly comparable with prior periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $43.1 | $30.1 | $119.8 | $84.7 |
| Gross profit | $32.6 | $22.7 | $90.1 | $62.5 |
| GAAP gross margin | 75.7% | 75.3% | 75.1% | 73.8% |
| Operating loss | ($4.0) | ($0.9) | ($12.8) | ($7.5) |
| Net loss | ($21.0) | ($10.0) | ($46.5) | ($35.3) |
| Adjusted EBITDA, non-GAAP | $14.4 | $14.5 | $42.9 | $40.7 |
| Adjusted EBITDA margin, non-GAAP | 33% | 48% | 36% | 48% |
| Cash from operating activities | Not provided quarterly | Not provided quarterly | $21.0 | $14.5 |
Q3 revenue grew 43% year over year; nine-month revenue grew 42%. Growth was principally from subscription expansion among existing customers and new customer additions, with a smaller contribution from Monocl. GAAP net loss attributable to Definitive Healthcare Corp. was $8.0 million for the quarter and nine-month period; reported loss per Class A share was $0.09, based only on the post-IPO period.
Cash, debt and liquidity
At September 30, 2021, cash and cash equivalents were $189.8 million, total current assets $226.6 million and current liabilities $103.0 million. Term debt was $275.0 million principal, or $272.3 million net of issuance costs; the $75 million revolving facility was undrawn. Net debt, using principal debt less cash, was approximately $85.2 million. The company had $70.2 million of deferred revenue and $207.6 million of remaining performance obligations, including $128.7 million current.
Operating cash flow of $21.0 million was offset by $5.7 million of investing outflows; financing provided $149.7 million, producing a $165.0 million increase in cash before exchange-rate effects. Financing included IPO proceeds and a new term loan, offset chiefly by repayment of the prior debt. Management stated cash, operating cash flow and available credit were expected to meet liquidity needs for at least the next 12 months.
Material changes, outlook and risks
- Operating expenses rose 55% in Q3 and 47% year to date, reflecting hiring and investment, IPO preparation and public-company costs, and higher stock-based compensation. Sales and marketing and product development spending increased as the company invested in growth.
- Q3 results included a $9.9 million loss on extinguishment of debt from refinancing. Nine-month results also included a $3.2 million increase in the Monocl contingent consideration liability. The reported Q3 net loss was substantially larger than the operating loss, in part due to debt-extinguishment and interest costs.
- The September refinancing replaced the 2019 facilities with a $275 million term loan and $75 million revolver, both maturing in 2026. The term loan had a 2.37% effective rate at quarter-end, is variable-rate, and includes quarterly amortization and an approximately $220 million maturity balloon. A 1 percentage-point rate change was estimated to affect nine-month interest expense by approximately $4.0–$4.2 million.
- The IPO-related tax receivable agreement created a $146.1 million liability. The company generally owes certain former owners 85% of realized or deemed tax savings; payments are not expected within the next 12 months, but could be substantial over time.
- No specific revenue or earnings guidance was provided. Management expected cost of revenue as a share of revenue to remain stable or rise modestly; sales and marketing and general and administrative costs were expected to increase in 2021, with public-company costs also increasing in 2022. Product development investment was expected to continue.
- Management said COVID-19 had not materially disrupted operations to date, but its medium- to long-term effects remained uncertain. Principal stated risks include competition, ability to maintain accurate data and data-provider access, customer acquisition and retention, platform innovation, cybersecurity, and uncertainty about sustaining growth and profitability. The company reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements.
- Monocl earn-out payments could range from zero to $10 million, subject to performance criteria, with qualifying payments expected in April 2022. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- How much revenue growth is recurring subscription expansion versus new customers, and whether customer retention and expansion remain strong.
- Whether operating expense growth and declining Adjusted EBITDA margin translate into improved or weaker future operating leverage; review non-GAAP adjustments against GAAP results.
- Ability to generate cash after deferred commission costs, capital spending and debt service, and compliance with the new credit agreement’s covenants.
- Variable-rate exposure and the term loan’s amortization and large maturity payment, alongside the company’s cash balance and undrawn revolver.
- Potential future cash payments under the tax receivable agreement, including effects of LLC-unit exchanges and any change of control.
- Effects of post-IPO stock compensation, dilution from outstanding equity awards and LLC-unit exchange rights, and the distinction between consolidated results and amounts attributable to public shareholders.