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Health Catalyst Inc (NASDAQ:HCAT)
Q3 2019 Earnings Call
Nov 12, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Health Catalyst, Inc. third-quarter 2019 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Adam Brown.

Please go ahead, sir.

Adam Brown -- Investor Relations

Good afternoon, and welcome to Health Catalyst's earnings conference call for the third quarter of 2019, which ended on September 30, 2019. My name is Adam Brown, I am the senior vice president of investor relations for Health Catalyst. And with me on the call is Dan Burton, Health Catalyst's chief executive officer; and Patrick Nelli, Health Catalyst's 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 the 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 and 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 differ materially. Please refer to the risk factors in our Form 10-Q for Q2 filed with the SEC on August 23, 2019, and our Form 10-Q for Q3 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 to GAAP measures is provided in our press release.

During the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details may be onetime in nature, and we may or may not provide updates in the future. With that, let me turn the call over to Dan for his prepared remarks; and then Patrick will provide his prepared remarks, as well as provide the outlook for Q4 and the full-year 2019. Dan and Patrick will then take your questions.

Dan Burton -- Chief Executive Officer

Thank you, Adam. And thank you to everyone who has joined us this afternoon. We are excited to share our third-quarter 2019 financial performance, along with the other highlights from the quarter. First, on our third-quarter financial results, I am pleased with our performance across the board.

To start, I am happy to report that our total revenue for Q3 2019 was $39.4 million. This represents an outperformance relative to the midpoint of our guidance. Total adjusted gross margin in the third quarter was 54%, which compares favorably to 50% in the third quarter last year. And our Q3 2019 adjusted EBITDA was a loss of $8.4 million, which represents an outperformance relative to the midpoint of our guidance and shows meaningful improvement from a loss of $11.3 million for the same period in the prior year.

Now let me transition to some of the highlights from the quarter. You'll recall from our last earnings call that we measure our company's performance in three primary strategic objective categories of improvement, growth and scale. And we'll discuss our third-quarter results with you in each of these categories. The first category improvement is focused on evaluating our ability to enable massive measurable improvements for our customers, while sustaining industry-leading satisfaction and engagement.

I'm pleased to report that the number of documented improvements achieved with our customers continues to accelerate. Through the first three quarters of 2019, we have more than doubled the total number of documented improvements achieved in all of 2018. In our view, this strong performance in customer-verified improvements is evidence of the Health Catalyst flywheel accelerating throughout our customer base. I would now like to highlight three examples of documented improvements from recently published case studies.

First, Hawaii Pacific Health leveraged our solution to more accurately forecast its workforce needs and more effectively manage staff schedules, which led to the realization of $2.2 million in savings in 16 months, while continuing to maintain high-quality clinical outcomes. Next, Orlando Regional Medical Center utilized our solution to address its need for patients to be seen more quickly in its emergency department. Orlando has reduced the time of patient arrival until first provider contacts by 46%, resulting in $1.2 million in additional revenue and reduced its overall emergency department length of stay by 22%. And third, ChristianaCare Health System leveraged our solution to determine that just 16 data features, 7% of the original data set, had the equivalent predictive value to its previous 236 features, which reduced the complexity of its 90-day admission predictive model.

The care managers at ChristianaCare, bolstered by a higher level of understanding and trust in this simplified algorithm, used the output of that machine learning tool to engage with an average of over 850 distinct members each week. We'd encourage you to please visit our website to view hundreds of documented customer case studies. Our next performance measurement category is growth, which we define as adding new customers, while also deepening existing customer relationships. Within this category, I'd like to share some highlights from our Sixth Annual Healthcare Analytics Summit that took place in September in Salt Lake City.

We view this annual conference as a meaningful opportunity for Health Catalyst to continue to provide thought leadership within the healthcare data and analytics industry, while carefully listening to our customers and to the broader industry. This year's conference hosted over 1,600 healthcare professionals and achieved an overall satisfaction rating of greater than 99%. The theme for this year's conference was powering digital transformation within healthcare. We heard from numerous keynote and breakout session presenters, who are on the leading edge of digital transformation within healthcare, including the latest advances in machine learning, artificial intelligence, natural language processing and wearables data to analyze and improve care.

We also had the opportunity to reflect on talks from technology innovators and leaders in other industries, speaking to how data and analytics transform their respective industries. While the conference was focused on highlighting and sharing the power of digital transformation within healthcare organizations, it was also an important reminder that healthcare's embrace of technology is slower than most industries, and that most healthcare organizations still need a trusted and experienced partner that can facilitate the use of data and analytics to help them achieve meaningful clinical, financial and operational improvements. Based on a survey of conference attendees, two-thirds characterize their organization's adoption of analytics as either in the beginning stage, where their organization is recognizing the importance of analytics, but in the early stages of determining what to do and how to do it, or in the middle stage, where their organization has started using data and analytics and are beginning to see results in a few select areas. As it is every year, the Healthcare Analytics Summit was an important opportunity for us to speak with our customers.

As part of the summit, we held our annual customer user group, along with our products and services showcase. These events, which were the most well attended in the history of the summit, were a chance for our customers to better understand the breadth of opportunities in their work with Health Catalyst, as well as for us to carefully listen to our customers' feedback. Hundreds of individuals from our customers attended, and we heard a few consistent themes, some of which I will share. First, we received feedback that our solution is highly differentiated within the market and that our customers continue to have a strong commitment to the partnership with us.

Next, we heard that healthcare organizations continue to value us as a partner who can drive results at the lower levels of the analytics adoption stack, especially in enabling greater efficiency. Consistent with my commentary that most healthcare organizations are in the early innings of digital transformation, another survey of conference attendees revealed that the majority of attendee organizations struggle most with administrative and operational efficiency and with data infrastructure transformation. This feedback reinforces the breadth of our solution, which is focused on driving customers up the analytics adoption stack over time as they mature with us. Lastly, we heard consistent feedback that our services offering should continue to be prescriptive as healthcare organizations are eager to work with a partner who can guide them to the adoption of best practices within the industry.

This year's summit also hosted hundreds of attendees from healthcare organizations who are not currently Health Catalyst customers. We held dozens of meetings with later stage sales prospects, which presented an important opportunity for these prospects to further understand our offering and to facilitate progress toward selecting Health Catalyst as their partner. Likewise, the conference is an important component of our early stage sales cycle, generating meaningful interest from our marketing prospects. And helping move them along in our sales funnel.

Moving on to more detail on our selling efforts. Our third-quarter performance was in line with management's modeled expectations used during the IPO roadshow process. We continue to add new customers within our core market and expand within our existing client base. We feel comfortable that our sales to date and our current sales pipeline supports the full-year 2019 guidance that Patrick will share later in this call.

Lastly, I'd like to share that we have appointed two new members of our board of directors. Effective January 1, 2020, Julie Larson-Green and Dawn Smith will join our board, resulting in an increase in the number of board of directors from nine to 11. We are honored to add these experienced leaders to our board, and we anticipate that they will contribute meaningfully to the growth and maturation of our company. By way of background, Julie Larson-Green currently serves as the chief experience officer of Qualtrics.

Prior to her time at Qualtrics, Julie spent 25 years at Microsoft, serving in a variety of executive leadership and product development roles, including building Microsoft Office, Windows, Internet Explorer, Xbox and Surface. Julie brings more than two decades of successfully applying artificial intelligence, collaboration and digital assistance capabilities at an incredible scale. Her world-class expertise in building and then scaling technology solutions will be deeply relevant as Health Catalyst works to continue to scale its technology offerings in the months and years ahead. Dawn Smith currently serves as the president and chief operating officer of Cologix, Inc.

Prior to her time at Cologix, Dawn served as senior vice president, chief legal officer, and chief compliance officer at VMware, where she led a team of more than 150 team members and was responsible for global legal, compliance and government relations. She also previously served as executive vice president and chief legal officer at McAfee. Dawn's regulatory, compliance and financial experience in public company settings, coupled with her operational leadership expertise and capability will directly contribute to our company's growth and scale, and will strengthen the effectiveness of our board. I am extremely pleased to welcome both Julie and Dawn to our board.

Now I'll turn the call over to Patrick, who will review our performance in the category of scale, including providing a detailed view of our third-quarter financial results, and our guidance for Q4 and the full-year 2019. Patrick?

Patrick Nelli -- Chief Financial Officer

Thank you, Dan. As Dan mentioned, I will be discussing our company's performance in the strategic objective category of scale. This category focuses on enabling greater contribution to our mission by sustainably scaling our organization. Before diving into our third-quarter financial results, I want to echo Dan's sentiment and say that I'm pleased with our third-quarter results and the momentum we are seeing across our business.

For the third-quarter 2019, we generated $39.4 million in total revenue. As Dan mentioned, this represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 20% year over year. Technology revenue was $21.2 million, an increase of 16% compared to the same period last year. And professional services revenue was $18.3 million, an increase of 25% year over year.

Total organic growth was driven primarily by recurring revenue from new customer additions from existing customers paying higher technology access fees from contractual built-in escalators, and from existing customers expanding their services relationships with us. As a reminder, our Medicity acquisition lapsed in Q2 2019, so we will no longer break out that revenue stream separately. In line with what we've communicated previously, however, I'd share that the Medicity business was a headwind on our technology revenue growth rate in the third quarter. Additionally, as a reminder of what we shared in our last earnings release, our Q3 2019 technology revenue growth rate faced a second headwind due to onetime legacy license revenue that was recognized in the third quarter of 2018 and did not recur in the third quarter of 2019.

Normalizing for the impact of this legacy licensed revenue, which was $1.1 million in Q3 2018, our year-over-year technology revenue growth rate would have been 23%. For Q3 2019, we achieved total adjusted gross margin of 54%, an improvement of approximately 400 basis points year over year. On the technology side, our adjusted gross margin was 68%, an increase of approximately 190 basis points year over year. This year-over-year increase was mainly driven by existing customers paying higher technology access fees from contractual built-in escalators without the corresponding increase in hosting cost, partially offset by headwinds due to the continued cost associated with transitioning a portion of our customer base to third-party cloud-hosted data centers in Microsoft Azure.

And on the professional services side, our adjusted gross margin was 37%, which represents an increase of approximately 800 basis points year over year. As a reminder, our professional services are comprised of data and analytics services, domain expertise services, outsourcing services and implementation services. While the majority of our services fall under the first two higher margin buckets, data and analytics services and domain expertise services, the delivery mix between these services in a given quarter can lead to a few percentage point fluctuation in our quarterly adjusted professional services gross margin compared to what we communicated as our long-term services adjusted gross margin expectation in the mid-30s. And in the third quarter, our services mix led our professional services adjusted gross margin to be a couple of percentage points higher.

As we look longer term, we continue to expect technology and professional services adjusted gross margins to be consistent with what we shared during our Q2 2019 earnings call. In Q3 2019, adjusted operating expenses totaled $29.6 million. As a percentage of revenue, adjusted total operating expenses were 75%, which compares favorably to 84% in Q3 2018. As a reminder, our healthcare analytics summit that was held in the third quarter is a meaningful quarterly expense, causing our quarter-over-quarter operating expenses to increase.

Additionally, there was roughly $200,000 worth of onetime operating expense spend that we had anticipated that would be expensed in Q3 2019 but will end up being incurred in Q4 2019. Adjusted EBITDA in Q3 2019 was a loss of $8.4 million, which compares favorably to an adjusted EBITDA loss of $11.3 million in the third quarter of 2018. As Dan mentioned earlier, we are pleased to report that we outperformed the midpoint of our guidance. Adjusted EBITDA performance was driven by the higher gross margins mentioned previously, more efficient deployment of our operating expenses, and the shift of roughly $200,000 worth of operating expense spend from Q3 to Q4 that I mentioned previously.

Lastly, our pro forma adjusted net loss per share was $0.27. I'd like to take a moment to discuss the components of our calculation of this metric. Our pro forma adjusted net loss per share starts with our GAAP net loss attributable to common stockholders and adds back as applicable any stock-based compensation, amortization of acquired intangibles, loss on extinguishment of debt, post-acquisition restructuring cost, and accretion of redeemable, convertible preferred stock. Our adjusted net loss for Q3 2019 was $9.8 million.

And the pro forma, as adjusted, weighted average number of shares used in calculating adjusted net loss per share in Q3, was 36.4 million shares. On a related note, I'd also mention that in order to calculate our share count under the treasury stock method, we have 7.9 million options outstanding at a weighted average strike price of $10.64, as well as 250,000 restricted stock units outstanding. Turning to the balance sheet. We ended the third quarter with $241.4 million of cash and short-term investments, compared to $33.2 million at year-end 2018.

As of September 30, 2019, we had $47.9 million in total debt, an increase of $27.8 million over the end of 2018. The increase in our cash balance and debt are the result of a financing event in Q1 2019 and our IPO that took place in Q3 2019. Before I move on to guidance, I will share a few additional thoughts related to adjusted EBITDA and our balance sheet strength. First, I've mentioned that consistent with what we've previously stated, we anticipate that we will begin 2022 on an adjusted EBITDA run rate breakeven basis.

Next, given the size of our current cash position of over $240 million, we anticipate we have significantly more than enough coverage to reach cash flow breakeven. I'll conclude my commentary with our guidance for the fourth-quarter and full-year 2019. For the fourth-quarter 2019, our guidance for total revenue is between $40 million and $43 million. For the full-year 2019, our updated guidance for total revenue is between $151.4 million and $154.4 million.

At their respective midpoints, this represents an increase of $2.1 million compared to the full-year revenue guidance we shared last quarter. For the fourth-quarter 2019, our guidance for adjusted EBITDA loss is between $9.2 million and $7.2 million. And for the full-year 2019, our updated guidance for adjusted EBITDA loss is between $30.1 million and $28.1 million. At their respective midpoints, this represents an improvement of $1.6 million compared to the full-year guidance we provided last quarter.

A couple of comments on this guidance. First, I would reiterate a comment from our last earnings call that our revenue in the fourth quarter of 2018 included certain performance-based revenue arrangements, where performance was measured and achieved in that quarter. Moving forward, we expect performance-based revenue arrangements to become a much smaller portion of our overall revenue base, and thus, they pose an approximately $2.5 million headwind to our Q4 2019 year-over-year revenue growth rate. Next I'd reiterate Dan's sentiment that we feel comfortable that our sales to date and current sales pipeline supports this full-year 2019 guidance.

I'll finish by saying that our third quarter represents a promising continuation to 2019, and we look forward to a strong finish in 2019. That concludes my review of our financial results, and I'd like to turn the call back to Dan for his closing remarks. Dan?

Dan Burton -- Chief Executive Officer

Thanks, Patrick. In summary, we are pleased with the performance of the company. We could not have made this progress without all the hard work, commitment and dedication of our health catalyst team members who work each day to enable our customers to realize improvements. We're looking forward to keeping you updated on our progress.

And with that, let's open it up for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from Anne Samuel with J.P. Morgan. Your line is now open.

Anne Samuel -- J.P. Morgan -- Analyst

Hi, guys. Thanks for taking the question. Without providing guidance, I was hoping maybe you could help walk us through how to think about headwinds and tailwinds looking into 2020? Thanks.

Dan Burton -- Chief Executive Officer

Absolutely. Thanks, Annie. So this is Dan. I'll share a few thoughts, and then Patrick, please feel free to add additional comments.

So as it relates to tailwinds, we continue to be excited about some of the investments that we're making, both from a core business perspective, as well as in some of the new markets that we've invested in. As it relates to our core markets, we're pleased with our performance as it relates to the addition of new clients, as well as the expansion of our existing clients. And as mentioned just a few minutes ago, we feel comfortable with the robustness of the pipeline moving into the fourth quarter of 2019 and beyond. That pipeline supports the long-term guidance that we've provided from a growth perspective previously.

Likewise, from a tailwinds perspective, we were pleased to see some additional progress, though the deals were small in some of our new markets like life sciences, where we signed an additional deal this time with an expansion within a current customer relationship. And likewise, in international, we were excited to see another contract signed, albeit a small contract in Asia Pacific, and we will continue to invest in that regard. As it relates to headwinds moving into 2020, as we have discussed previously, the acquisition of Medicity represents a revenue headwind, generally speaking, as that core business is a flat to slightly declining business. Though we are excited and anticipating one of the benefits of that acquisition, as we've mentioned previously, being the opportunity to cross-sell to that core Medicity installed base.

And given the one-year sales cycle, we anticipate much of that cross-sell opportunity manifesting in 2020 and beyond. But that core business is certainly a continued headwind, though that component will continue to diminish as a percentage of the total revenue of the company as the company continues to grow. Let me pause there and see, Patrick, if you would add anything.

Patrick Nelli -- Chief Financial Officer

The only other numbers I would add as a tailwind is since we have greater than 90% of our revenue under a recurring fashion. And since we have greater than 100% dollar-based retention, and our current customers expand with us as they mature with us over time, both of those factors give us a natural tailwind going into a year because the vast majority of our revenue for that year will be revenue under contract from current clients.

Anne Samuel -- J.P. Morgan -- Analyst

That's very helpful. Thanks guys.

Patrick Nelli -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Robert Jones with Goldman Sachs. Your line is open.

Robert Jones -- Goldman Sachs -- Analyst

Great. Thanks for the questions. I guess maybe just a similar question. I know you guys in the past have talked about having fairly good visibility given the length of the sales cycle, for at least the following six months, just given the nature of the sales cycle, looks like based on the 4Q guide, the recent strength you guys have experienced, clearly, it looks like it's expected to continue.

And I know Patrick will get more on the full-year 2020 next quarter. But just -- I'm wondering if maybe you could weigh in a little bit on how does the start of 2020 look from where you sit today? Just any sense you can give us on how the sales pipeline is progressing relative to previous expectations would be helpful.

Dan Burton -- Chief Executive Officer

Yes. I'll share a few overall thoughts. And then Patrick, you can share any additional thoughts. I would share and reiterate that we feel good about where we are.

We feel comfortable that the pipeline, as it stands today, is in support of the projections, including the updated forecast for Q4 and the full-year 2019 that Patrick just shared, which was an increase to what we had communicated previously. I would also agree with you that we do benefit from significant visibility, both because of the recurring nature of our existing relationships. And our business model of a recurring revenue business model such that we enter any given year with typically greater than 90% visibility into the revenue for that year. Likewise, as you said, given the longer sales cycle on average that we experienced, we do have a sense for how that pipeline will play out over time.

And I would just reiterate what we've said previously, that we continue to feel comfortable with the long-term growth guidance that we have provided previously as it relates to our growth profile.

Patrick Nelli -- Chief Financial Officer

Well said, Dan.

Robert Jones -- Goldman Sachs -- Analyst

Great. I guess just a follow-up question on that as it relates to the summit. I appreciate all the perspective and details you guys shared around this year's summit, but obviously not having the historical perspective. I'm curious, how would you characterize the feedback from this year's summit versus previous ones? It does sound like in the prepared remarks, you mentioned that this has historically been a platform for generating, say, sales leads.

And so wondering how this one went relative to ones in the past? And then I guess just related to that, Dan, I appreciate you sharing some of the survey results from the summit. As you pointed out, it sounds like many customers are in the early innings, not surprisingly, of embracing technology and analytics. Curious on that front. Just how did those results compare to what you had expected to hear from the attendees?

Dan Burton -- Chief Executive Officer

Yes. Great question. Thank you for asking, Bob. So I'll offer a couple of thoughts.

First, as it relates to how this summit compared to prior summits. As I mentioned in the prepared remarks, we were pleased to see this as the most well attended summit. So we had both the most overall attendees to the summit. And well, it's the most overall attendees to our User Group, which happens prior to the broader summit.

So it was an opportunity for us to listen to and receive feedback from the widest audience that we've ever had in terms of the summit's history. Now every year has followed that same pattern, where the most current attendee group is the largest in the history. So it does follow a pattern that we've seen over the years. As it relates to the specific feedback, the survey feedback that you asked about, I would share, and I alluded to this in the prepared remarks, that one of the interesting patterns that I think we are trying to be responsive and careful listeners to, is as it relates to that analytics adoption model or that analytics adoption stack that we talk a lot with our clients about how we can help them mature in their analytics capabilities over time.

And one of the most significant pieces of feedback that our clients, including our most mature clients came back with, was the continued need for help at the lowest levels of that analytics maturity model at the foundational levels of aggregating data, at the foundational levels of reporting the results to regulatory bodies. For example -- that they're required to report. Those lower levels of analytics activities continued to be very, very significant areas of needed improvement, of potential efficiency gains, and our clients shared with us very direct feedback that they would like more of our help at those lower levels. And it's often tempting for us and even for our clients to jump up that maturity model and get excited about the latest, most cutting-edge artificial intelligence, algorithms and capabilities.

And a lot of what we are trying to have the discipline to do is to ensure that we're doing everything that we should be doing to be a good long-term partner to these clients, in helping them with the foundational elements lower in that maturity model that have to be in place if you're going to actually scale and leverage those more advanced capabilities. So that would be, I think, thematically, one of the most significant elements that came out of this year's summit.

Robert Jones -- Goldman Sachs -- Analyst

Very helpful. Thanks so much.

Operator

Thank you. Our next question comes from Ryan Daniels with William Blair. Your line is now open.

Jared Haase -- William Blair -- Analyst

Yes. Hi, this is Jared Haase in for Ryan. Congrats on the quarter. I wanted to just kind of jump back to professional services' gross margin.

Patrick, I appreciate some of the details you provided there. Just on kind of the benefit you saw from the mix of services. If I recall, back in the second quarter, we had talked about you feeling like the team was maybe stretched a little bit thin there and kind of the need for some hiring investments. Just curious if you have any updates on that front, kind of where you stand? And if you saw any benefit from kind of a leaner team in that respect during the third quarter?

Dan Burton -- Chief Executive Officer

Yes. Great question, Jared. Thank you. So as it relates to the desire that we shared last quarter to catch up and ensure that our team members in professional services have a sustainable pace.

We are pleased with the progress that we've made in actually catching up, and we feel good about where we are today. We benefited from the fact that Health Catalyst continues to be recognized as a best place to work. We saw the pattern continue of -- for every position that we posted, we averaged more than 50 applicants. And for every offer that we extended, we averaged a greater than 90% acceptance rate.

We continue to also see very low voluntary turnover rates at Health Catalyst, which really helps us to deliver against our mission and against the the objective of measurable improvement with clients. I would also share as it relates to the gross margin performance of the professional services organization, mix is a very important component, as Patrick mentioned in his prepared remarks. And mix can cause a meaningful difference of a few percentage points in gross margin, up or down from what we've shared to be that long-term guidance in the mid-30s. As an example, earlier this year, in Q1, we recorded a gross margin in the services space of 32%, which was driven primarily by the mix of services being demanded, skewing more toward the outsourced and implementation type services.

And we view that as something that could repeat itself in the future, and not be a negative for the business or for our client relationships, but rather just be tied to the mix shifting over time.

Jared Haase -- William Blair -- Analyst

Got it. That's very helpful color. And then maybe just one more as a quick follow-up. Maybe taking a step back, and we've talked in the past about sort of a 70-30 split on the technology subscription customers, 70% being kind of an all access subscription versus roughly 30% on more of a limited subscription.

I'm curious, given where the pipeline is at today, if you've seen any meaningful shift from that? Or do you sort of expect that to kind of remain consistent going forward? I guess, maybe just wondering if the value proposition of sort of that all access model continues to resonate with customers?

Patrick Nelli -- Chief Financial Officer

Yes. Good question. We do see it continuing to resonate with customers, and we haven't seen any meaningful shift from what we communicated previously.

Jared Haase -- William Blair -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Sean Wieland with Piper Jaffray. Your line is now open.

Sean Wieland -- Piper Jaffray -- Analyst

Hi, thanks. I wanted to ask about the launch of the Pop Health product that you announced in June. That seemed to align pretty well with what folks were saying at your summit. I think you called out 22% believe that their Pop Health strategies weren't working.

So I was wondering if you could highlight any anecdotes there?

Dan Burton -- Chief Executive Officer

Yes. Great question, Sean. So we also felt that the launch of the Pop Health Foundations solution that we talked about in our last earnings conference call aligned well with the feedback that we were receiving from clients, generally, as well as specific to Population Health, where, just as I mentioned a few minutes ago, that general feedback that we need to not skip the foundational components of what's required to be in place in order for us to get more advanced, is true, generally. It's also true from the feedback that our clients gave us with regards to Pop Health.

And there was a general appreciation recognition that that foundations bundle helped to accomplish some of those foundational elements that are prerequisites required to really make meaningful progress in terms of identifying the right patients to be included in a care management program, for example, using data aggregated from multiple sources, being able to understand those populations using a tool like Population Builder, and being able to quickly analyze the performance of different Pop Health programs at a foundational level using Rapid Response Analytics, for example. So those were validated, I think, in large part, again, thematically consistent with our clients needing foundational health before we skip ahead to more advanced cases and examples.

Patrick Nelli -- Chief Financial Officer

The only other item I would add is that we also heard at the summit that our customers are still in the early stages of taking risk and moving to fee for value. But a lot of them want to put in place the right analytics infrastructure to ensure they're successful as they continue to move toward fee for value.

Sean Wieland -- Piper Jaffray -- Analyst

Great. And Patrick, just one other for you. The $1.1 million of legacy license revenue from Q3 '18 that did not recur. Could you call out this quarter or, perhaps, this year the amount of legacy license revenue, say, this year that won't recur in 2020?

Patrick Nelli -- Chief Financial Officer

Yes. Of course. We can -- and we can follow-up with more specifics offline, but it's been a relatively small amount this year, year to date. To give everyone some color on this, we moved from a perpetual license to a subscription model starting in approximately 2015.

And in 2018, greater than 90% of our revenue was recurring in nature. So we were, for all intents and purposes, kind of through the vast majority of that transition, but there still was a small amount of onetime license revenue, which as I mentioned before, there was about $1.1 million that occurred in Q3 2018. This year, year to date, we've had a very small amount, but I can -- we can follow-up with an exact number.

Sean Wieland -- Piper Jaffray -- Analyst

OK. And then what was the $2.5 million that you called out in Q4 headwind?

Patrick Nelli -- Chief Financial Officer

Yes. Of course. So previously, we had more performance-based arrangements, primarily on the services side with a handful of customers. And essentially, we would set certain financial, clinical and operational metrics.

And if us working with our customer, if we hit those metrics, we would receive -- you could think of it as a bonus payment. Over time, actually, our customers gained a lot of trust with us, and they wanted budget predictability. So we actually moved away from these more onetime performance-based bonus payments to a more predictable recurring subscription model. And that's actually what you can see in the numbers that we had approximately $2.5 million of onetime of these performance-based payments in Q4 of 2018, that we've moved away for -- away from, and now that revenue has moved completely to our recurring model.

Sean Wieland -- Piper Jaffray -- Analyst

Got it. That's all I had. Thank you.

Operator

Thank you. Our next question comes from Michael Newshel with Evercore. Your line is now open.

Michael Newshel -- Evercore ISI -- Analyst

Thanks. Could you just characterize the overall selling environment for hospitals right now, with all the policy noise that's out there? Is any of that uncertainty headed into election next year, delaying strategic or buying decisions? Or were you seeing any impact on your sales efforts at all?

Dan Burton -- Chief Executive Officer

Yes. Good question. Thank you for asking, Michael. So unlike some other companies that are -- that have a business model that's much more directly tied to movement like the move from fee-for-service to fee-for-value.

Our business model is much more about helping our clients deal with data complexity, and then leverage that complex data to analyze it and then optimize their decision-making in any environment. And so we have not historically seen a significant movement based on the political environment, based on the speed with which the economic model is shifting because there's data complexity in all of those scenarios. And so we have not seen any specific impact in either direction as it relates to our pipeline.

Michael Newshel -- Evercore ISI -- Analyst

And then maybe if I could just follow-up with one more. I just want to clarify your comments on the revenue outlook for Medicity for 2020. So obviously, the acquired revenue stream is still shrinking, as you pointed out, but do you think you'll make enough cross-sells in the near term to get to a positive net growth for that customer base in 2020? Or is that inflection further out?

Dan Burton -- Chief Executive Officer

Good question. So we do think about that in two separate categories. So the first category is we model and try to understand and forecast the core business, and we continue to see the pattern that we had modeled before we acquired the business. In fact, we're just a little bit ahead of our forecast in terms of that core business performance relative to the modeling that we did before acquiring the business.

That's the first category, and we believe that that same pattern will continue in 2020 and beyond of flat to slightly declining revenue in the core business. Then we also modeled back before we acquired the business, what we expected would be a realistic forecast for cross-sell within that existing customer base. And as we've mentioned previously, we knew when we looked at forecasting this business that we would need to take the first nine months or so to make sure that we were addressing the team member components operationally to make sure we had the right size of team member base and that we had stabilized the core product as well, that customers don't want to hear a cross-sell message if the core product is not being adequately supported. So we knew we needed to take time to do those two things first.

And given the typical one-year sales cycle, we really only -- previously this -- earlier this year, began those discussions with clients as it relates to cross-sell. So we anticipated that most of the benefit of that cross-sell would happen in 2020 and beyond, and we feel comfortable that we're on track with regards to what we had forecasted to be the impact of that cross-sell on our overall growth trajectory long term.

Michael Newshel -- Evercore ISI -- Analyst

Thank you very much.

Dan Burton -- Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from Daniel Grosslight with SVB Leerink. Your line is open.

Daniel Grosslight -- SVB Leerink -- Analyst

Thanks for taking the question, guys. Just a quick one on your 2020 revenue outlook. As you look forward, I know each year, most of your clients have an auto-renewal for their contracts, at least the DOS clients. Are there any big contracts coming up for renewal near term? And have you seen any deviation from historical client churn of your DOS clients?

Dan Burton -- Chief Executive Officer

Yes. Good question. Thank you, Daniel. As you mentioned, essentially, all of our client relationships are structured in such a way on both the tech and the services side that each year, they have the opportunity to choose whether to renew or not renew in their relationship or expand that relationship or contract the relationship.

And so consistently throughout the year, we have clients who are coming up on that renewal decision, and this has been the case for a number of years. We've been really pleased given that fact that, as we've shared previously, those clients who are in that 70% category that are all access tech subscription clients, we've never lost one of those clients across multiple renewal-year cycles. And we anticipate that same kind of performance that we've historically had in terms of the dollar-based net retention of our client base at 107% in 2018, and 108% in 2017 to be a good way of thinking forward about the company's performance with its clients in 2020 and beyond.

Daniel Grosslight -- SVB Leerink -- Analyst

Got it. And then just a follow-up on tech gross margin. It outperformed our estimates pretty substantially. I was expecting some more degradation due to the transition to the cloud, but it seems like that was well offset by some pricing escalators.

Going forward, do you think -- I guess, is that due to costs being pushed out to Q4? And we should see a return to kind of mid-60s Q4? Or is there some structural benefit that you're getting from the business?

Patrick Nelli -- Chief Financial Officer

Yes. Of course. When you -- when we think about our tech gross margin, our tech cost of revenue, in particular, there are two primary components. The first are our cloud or hosting costs.

The second are our personnel costs to support our technology revenue and our cloud environment. We essentially worked very hard to drive efficiencies in both of those, and you saw some of those efficiencies come through this past quarter. As we look out over the next couple of years, we do continue to expect for overall gross margins to stay roughly flat due to the fact that we still have a few remaining on-prem and private cloud data center customers that we need to move to the Microsoft Azure environment. As we look out more than a couple of years, we continue to expect the long-term gross margins that we communicated on the Q2 earnings call of overall gross margins in the high 50s.

So in summary, we're certainly working every day to continue to drive efficiencies on the technology gross margin line, but we do have the headwind of continuing to move a few customers to the Microsoft Azure environment.

Daniel Grosslight -- SVB Leerink -- Analyst

Got it. Thank you.

Operator

Thank you. And our next question comes from Stan Berenshteyn with SunTrust. Your line is open.

Stan Berenshteyn -- SunTrust Robinson Humphrey -- Analyst

Hi, thanks. I'm actually asking on behalf of Sandy Draper. Just wanted to get your thoughts on the Google-related news, where they're essentially ingesting data from Ascension Health System. To what extent do you see that as a competitive force to your own offering?

Dan Burton -- Chief Executive Officer

Yes. Thank you for that question, Stan. So we believe, long term, that the cloud companies that operate and have built a cloud business at scale, at a significant scale, will have an important long-term role to play and contribution to make to the healthcare overall ecosystem. It's one of the reasons why a number of years ago, we decided to partner with Microsoft and move all of our clients over time, onto the Azure environment.

The scalability of that cloud environment offers a significant advantage, including efficiency advantages, but also significant scale capabilities from a data and analytics perspective that we believe the industry, broadly speaking, will benefit from at a dramatic level. What we have focused on is higher in the technology stack, within the healthcare-specific area at a data platform layer, most of our $100 million of investment is specific to healthcare content, healthcare algorithms, healthcare data sources, and mapping those data sources, automating that process of bringing data into the data platform in an automated and fast way. Likewise at the apps layer, and then even more so at the services layer, we've made a long-term commitment to complement the data platform capabilities with the right healthcare specific applications and the right healthcare specific domain expertise, which is why our business model and our company profile includes a significant portion of our revenue, historically, around 45% of our revenue in the services space because we found, as we move up the stack, the healthcare specific domain expertise that's required to be an ideal long-term partner to our health system clients is very pronounced. And it's a different business model.

It's a different economic profile from what you see lower in the technology stack, where these cross-industry cloud companies have typically enjoyed a much more high gross margins, very scalable business. And it's one of the reasons why we expect that, long term, those cloud-based companies will end up choosing to play a meaningful role, but stay lower in the technology stack.

Stan Berenshteyn -- SunTrust Robinson Humphrey -- Analyst

Got it. That's very helpful. Thank you.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Dan Burton for any further remarks.

Dan Burton -- Chief Executive Officer

Thank you for your interest in Health Catalyst. Thank you for the opportunity to share with you updates as it relates to our most recent quarter. We look forward to future discussions. Have a great day.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Adam Brown -- Investor Relations

Dan Burton -- Chief Executive Officer

Patrick Nelli -- Chief Financial Officer

Anne Samuel -- J.P. Morgan -- Analyst

Robert Jones -- Goldman Sachs -- Analyst

Jared Haase -- William Blair -- Analyst

Sean Wieland -- Piper Jaffray -- Analyst

Michael Newshel -- Evercore ISI -- Analyst

Daniel Grosslight -- SVB Leerink -- Analyst

Stan Berenshteyn -- SunTrust Robinson Humphrey -- Analyst

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