Definitive Healthcare Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. The company provides healthcare commercial intelligence through a SaaS platform, with substantially all revenue from subscriptions and more than 3,000 customers at quarter-end.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $57.4 | $43.1 | $162.1 | $119.8 |
| Gross profit / margin | $47.7 / 83.1% | $32.6 / 75.7% | $129.2 / 79.7% | $90.1 / 75.1% |
| Operating loss | $(9.4) | $(4.0) | $(31.6) | $(12.8) |
| Net loss | $(6.4) | $(21.0) | $(29.0) | $(46.5) |
| Adjusted EBITDA / margin | $16.4 / 29% | $14.4 / 33% | $46.7 / 29% | $42.9 / 36% |
- Q3 revenue grew 33% year over year; nine-month revenue grew 35%. Subscription revenue was $56.2 million in Q3 and $159.1 million for nine months.
- Q3 operating loss widened despite higher revenue, as operating expenses rose 56% to $57.1 million. Sales and marketing, product development, and general and administrative costs increased, including from hiring, stock compensation and public-company costs.
- Q3 net loss narrowed year over year, principally reflecting lower interest expense and a $5.2 million gain from remeasurement of the tax receivable agreement (TRA); Q3 2021 included a $9.9 million debt-extinguishment loss.
- Operating cash flow was $39.8 million for the first nine months, versus $21.0 million in 2021. Investing cash outflow was $181.0 million, including purchases of short-term investments and the Analytical Wizards acquisition; financing cash outflow was $17.2 million. Cash and cash equivalents declined to $228.8 million from $387.5 million at year-end.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $228.8 million and short-term investments were $120.8 million. The $75.0 million revolving facility was undrawn; management reported total available liquidity of approximately $424.6 million including the facility.
- Term-loan principal was $268.1 million, with a $265.9 million net carrying value; $6.9 million was current. The loan matures in September 2026 and includes an approximately $220 million balloon payment at maturity. The company reported covenant compliance and no revolver borrowings.
- Variable-rate exposure is partly hedged by two interest-rate swaps, each with a $67 million notional amount, maturing in March 2025. A hypothetical 1 percentage-point rate change would have affected nine-month interest expense by approximately $2.1 million, excluding the swaps.
- Total assets were $2.12 billion, including $1.32 billion of goodwill and $361.7 million of net intangible assets. The balance sheet also included a $157.2 million TRA liability and $91.5 million of net deferred tax liabilities.
Material changes, outlook and risks
- Revenue growth reflected expansion among existing customers, new customers and the Analytical Wizards acquisition, completed in February 2022. The acquisition’s total purchase consideration was approximately $99.4 million; purchase-price allocations remained provisional. Its post-acquisition standalone results were not material.
- Management said macroeconomic uncertainty, rising interest rates and more stringent customer approvals were lengthening sales cycles. It expects these conditions to reduce 2023 revenue growth if they persist, and expects NDR growth at year-end 2022 and 2023 to be lower unless conditions improve. The filing provides no numerical revenue or earnings guidance.
- Management believes operating cash flow, cash and investments, and revolver availability will meet liquidity needs for at least 12 months, while noting financing could become harder or more costly in unfavorable markets. It also cited potential added funding needs for significant acquisitions.
- Unusual items include a $1.0 million impairment charge related to office relocations, a go-to-market integration project, and equity-based compensation of $25.0 million for the first nine months. The company recorded a valuation allowance against deferred tax assets it determined were not more likely than not to be realized.
- On October 31, 2022, after quarter-end, the credit agreement and interest-rate swaps were amended to replace LIBOR with Term SOFR. Management said there were no material changes to previously disclosed risk factors; ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Track whether longer deal cycles affect bookings, NDR, cRPO and the company’s stated expectation for slower 2023 revenue growth. Total remaining performance obligations were $246.6 million, down from $250.5 million at December 31, 2021.
- Assess the balance between revenue growth and rising operating costs, including the increase in stock-based compensation and the decline in Adjusted EBITDA margin.
- Review cash deployment and debt exposure: the reported cash decline includes substantial short-term investment purchases and acquisition spending; the term loan is variable-rate, partly hedged, and has a large maturity payment.
- Monitor final purchase accounting for Analytical Wizards, TRA liability and future payment obligations, and the realizability of deferred tax assets.
- Interpret year-over-year loss and per-share comparisons with care: the 2021 reporting period includes pre-IPO Definitive OpCo results, and the company’s consolidated results include noncontrolling interests.