Health Catalyst Inc (HCAT) Q2 2021 Earnings Call Transcript

Health Catalyst Inc (HCAT 7.68%)
Q2 2021 Earnings Call
Aug 05, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Health Catalyst, Inc. Q2 2021 earnings conference call. My name is John, and I'll be operator for today's call. [Operator instructions] And I will now turn the call over to Adam Brown.

Adam Brown -- Senior Vice President of Investor Relations and Financial Planning and Analysis

Good afternoon, and welcome to Health Catalyst's earnings conference call for the second quarter of 2021, which ended on June 30, 2021. My name is Adam Brown. I am the senior vice president of investor relations and financial planning and analysis for Health Catalyst. And with me on the call is Dan Burton, our chief executive officer, and Bryan Hunt, our 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 the impact of the COVID-19 pandemic on our business and results of operations, our pipeline conversion rates and our general 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 materially differ. Please refer to the risk factors in our Form 10-Q for Q1 2021 filed with the SEC on May 7, 2021, and our Form 10-Q for the second quarter of 2021 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 financial measures to their most comparable GAAP measures is provided in our press release. With that, let me turn the call over to Dan for his prepared remarks, and then Bryan will subsequently provide his prepared remarks. Dan and Bryan will then take your questions. Dan?

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 second-quarter 2021 financial performance, along with additional highlights from the quarter. I will begin today's call with some commentary on our second-quarter 2021 financial results by sharing that we are pleased with the company's overall financial performance. Our Q2 2021 total revenue was $59.6 million, and our adjusted EBITDA was $1.7 million, with these results exceeding the midpoint of our quarterly guidance on each metric.

As it relates to our adjusted EBITDA performance, we are excited to have achieved positive quarterly adjusted EBITDA for the first time since the company's incorporation. And while we anticipate being adjusted EBITDA negative in the second half of 2021, we view this achievement in the second quarter as an important milestone in demonstrating continued progress in the operating leverage of our business. Additionally, I would like to highlight that our Q2 2021 technology revenue was $35.5 million, representing 39% growth year over year, and our Q2 2021 total adjusted gross margin was 54.4%, representing an increase of approximately 530 basis points year over year. Now, let me highlight some additional items from the quarter.

You will recall from our previous earnings calls that we measure our company's performance in the three strategic objective categories of improvement, growth and scale. And we'll discuss our quarterly results with you in each of these categories. The first category, improvement, is focused on evaluating our ability to enable our customers to realize massive, measurable improvements while also maintaining industry-leading customer and team member satisfaction and engagement. First, let me share a few examples of customer improvements from recently published case studies.

The first two improvement vignettes highlight our work with our customers supporting their population health and care management needs, while the last vignette highlights the synergies of our technology offering with one of our recent acquisitions. First, at Queen's Health System, nearly 60% of their emergency department visits were from a patient population suffering from homelessness. In many of those instances, those patients would have received better care for their specific needs outside of the emergency department at a materially lower expense. In response, Queens leveraged our software, including our DOS data platform, along with our analytics applications, to develop a robust and targeted care management program, enabling data informed care navigation to better serve this unique patient population.

This care management improvement work allowed Queen's to realize the avoidance of more than $16 million in costs. The result of reduced emergency department utilization, length of stay and readmissions. Next, ChristianaCare Health System was experiencing operational strain imposed by the COVID-19 pandemic and therefore sought a data-informed approach to accurately identify patients within its populations most at risk for severe illness or hospitalization from COVID-19. Leveraging our DOS data platform and our newly released healthcare.ai technology solution, ChristianaCare enhanced its care management program by effectively implementing predictive analytics to assign a risk score to each patient and prioritize targeted outreach and interventions to the highest risk patients.

This work allowed ChristianaCare to meaningfully reduce hospital and intensive care unit admissions, resulting in savings of $1.8 million. Lastly, MultiCare Health System experiencing significant growth along with changing payer reimbursement and billing guidelines, leveraged our solution, including our DOS platform and Vitalware's Vital Integrity application, our software-enabled MultiCare to access timely and actionable insights, leading to improved revenue cycle performance, optimized charge capture processes and reduced losses. In just three months, MultiCare identified and resolved more than 350 charge capture issues, retaining more than $6 million in net revenue. The organization also identified $36.6 million in additional annual gross revenue at risk of not obtaining optimal reimbursement, providing MultiCare the opportunity to intervene.

Our next strategic objective category is growth, which includes beginning new customer relationships while also expanding existing customer relationships. To begin, our current operating environment is largely consistent with commentary that we shared on our last two earnings calls. The COVID-19 pandemic continues to result in both headwinds and tailwinds as it relates to our growth. And as such, we are reiterating the 2021 bookings expectations that we shared on our previous earnings calls.

In terms of headwinds, we anticipate our provider end market will continue to be under some amount of operational and financial strain over the coming months as healthcare organizations deal with the continued COVID-19 surge, especially given the rise in the Delta variant, alongside vaccine rollout logistics. As it relates to tailwinds, we continue to see meaningful evidence that the healthcare provider ecosystem is much better equipped and prepared to respond to the ongoing pandemic in areas including treatment efficacy, supply chain logistics, capacity planning and broader operational optimization. And lastly, we continue to believe that the COVID pandemic will serve as an overall tailwind in the industry's adoption of data and analytics, significantly highlighting the need for a commercial-grade data and analytics solution to replace patchwork homegrown systems. In terms of focal areas for current and prospective customers, the highest demand areas include software to enable population health efforts, as well as revenue and cost optimization analytics.

As such, in addition to our recent Twistle acquisition, we are also encouraged to see the relevance and robustness of recently released additions to our population health and financial improvement solution suites, which I'll describe next. First, we recently introduced our value optimizer analytics application. Value optimizer is an enhancement to our existing population foundations analytics application suite focused on identifying the most significant opportunities for value-based care performance improvement. As healthcare organizations further focus on their population health initiatives and enter into a greater number of risk-based contracts, our value optimizer product allows for a comprehensive quantified view of potential financial improvement opportunities, and it provides continually refreshed data and benchmarking along with transparent risk and benchmarking methodologies.

Next, I would like to highlight our recent introduction of PowerLabor, a new internally developed analytics application within our financial improvement solution suite. Our PowerLabor solution is focused on addressing a CFO's need for cost optimization within his or her largest operating expense line item, labor, which accounts for nearly 60% of hospital costs. Built on top of our DOS data platform, PowerLabor allows healthcare decision makers to accurately predict labor needs, plan for changes in staffing and optimize staff to patient ratios. Leveraging data from disparate sources, PowerLabor enables optimization of labor resources, improvement of operations and ultimately reduced overall labor spend.

We anticipate that the introduction of these software solutions will further solidify our ability to capitalize on some of the highest demand areas within our end market. Also, in the context of our growth efforts, let me next mention that we are looking forward to hosting our eighth annual Healthcare Analytics Summit in September. While the format will be virtual again this year, we continue to believe that this conference represents a meaningful opportunity for Health Catalyst to continue to provide thought leadership within the healthcare data and analytics ecosystem, while carefully listening to our customers and prospects as we further cultivate and deepen those relationships. The theme of this year's conference will be multi-domain analytics, and we are fortunate to feature many of the leading voices in the country as our keynote speakers.

As a reference, last year's summit attracted thousands of registrants from more than 750 healthcare organizations across the world. Lastly, I would like to make a few comments on our recent acquisition of Twistle, which we are happy to announce officially closed on July 1, 2021. As a reminder, Twistle is a leading patient engagement software solution that automates personalized communication between care teams and patients, leveraging rich clinical content. We anticipate Twistle will meaningfully bolster our population health and analytics application suite as healthcare organizations increasingly look for a comprehensive population health solution.

This is particularly important as healthcare organizations begin to normalize operations outside of COVID-19 with many reprioritizing the transition to value-based care models and optimizing care delivery in virtual settings. The Twistle technology also has applicability in the clinical and quality improvement space through established clinical pathways and patient communication channels, as well as in the life sciences market. We are thrilled to welcome our highly talented Twistle teammates to help Catalyst further enabling our mission to be the catalyst for massive, measurable, data-informed healthcare improvement. Likewise, looking out over the next few quarters, we continue to be encouraged by a high-quality acquisition pipeline.

With that, let me turn the call over to Bryan. Bryan?

Bryan Hunt -- Chief Financial Officer

Thank you, Dan. Before diving into our quarterly financial results, I want to echo Dan's sentiment and say that I'm pleased with our second-quarter 2021 results. I will now comment on our strategic objective category of scale. For the second quarter of 2021, we generated $59.6 million, in total revenue.

This represents an increase of 38% year over year and was an outperformance relative to the midpoint of our guidance. This outperformance was driven mainly by new contracts signing earlier in the quarter than forecasted, along with a modest amount of unforecasted non-recurring professional services revenue. Technology revenue for Q2 2021 was $35.5 million, representing 39% growth year over year. This year-over-year growth was driven primarily by recurring revenue from new customer additions, from existing customers paying higher technology access fees as a result of contractual built-in escalators and from our Vitalware acquisition that closed September 1, 2020.

Professional services revenue for Q2 2021 was $24.1 million, representing 36% growth relative to the same period last year. This year-over-year performance is primarily due to our professional services being provided to new DOS subscription customers. COVID-19 related temporary credits we offered to a subset of our customers in Q2 2020 that did not recur this period and a modest amount of non-recurring professional services revenue recognized in Q2 2021, partially offset by lower professional services dollar-based retention achieved in 2020 relative to historical performance as a result of the COVID-19 pandemic. Total adjusted gross margin for the second-quarter 2021 was 54.4%, representing an increase of approximately 530 basis points year over year.

In the technology segment, our Q2 2021 adjusted technology gross margin was 68.3%, a decrease of approximately 35 basis points relative to the same period last year. This year-over-year performance was mainly driven by existing customers paying higher technology access fees from contractual built-in escalators without a commensurate increase in hosting costs, offset by headwinds due to the continued costs associated with transitioning a portion of our customer base to third-party cloud-hosted data centers in Microsoft Azure, which increases our hosting costs. In the professional services segment, our Q2 2021 adjusted professional services gross margin was 33.9%. Representing an increase of approximately 1,290 basis points year over year and an increase of approximately 240 basis points relative to Q1 2021.

Our year-over-year performance was mainly the result of some shift in the mix of professional services delivered, a higher utilization rate than forecasted, COVID-19 related temporary credits we offered to a subset of our customers in Q2 2020, and a modest amount of non-recurring professional services revenue recognized in Q2 2021. In Q2 2021, adjusted total operating expenses were $30.8 million. As a percentage of revenue, adjusted total operating expenses were 52%, which compares favorably to 59% in Q2 2020. Adjusted EBITDA in Q2 2021 was $1.7 million, exceeding the midpoint of our guidance and comparing favorably to an adjusted EBITDA loss of $4.2 million in the second quarter of 2020.

This Q2 adjusted EBITDA result was mainly driven by the strong revenue and gross margin performance mentioned previously. Additionally, it was partially driven by the timing of some non-headcount expenses that we anticipate will be pushed out into subsequent quarters in 2021, slower travel expense ramp than forecasted and moderately slower hiring than anticipated. Our adjusted net loss per share in Q2 2021 was approximately $0.00. The weighted average number of shares used in calculating adjusted net loss per share in Q2 was approximately 44.9 million shares.

Turning to the balance sheet. We ended the second quarter of 2021 with $263 million of cash, cash equivalents and short-term investments compared to $271 million at year-end 2020. As a reminder, in April 2020, we issued a private placement of convertible notes with a principal amount of $230 million, and we used a portion of the proceeds to extinguish an outstanding term loan. After deducting the unamortized debt discount related to the conversion feature of $50.9 million, and unamortized issuance costs of $4.3 million, as of June 30, 2021, the net carrying amount of the liability component of the convertible notes is $174.8 million.

Also, as a reminder, we closed the acquisition of Twistle on July 1, 2021, which included a cash component for the purchase price of approximately $57.5 million, resulting in pro forma cash, cash equivalents and short-term investments balance of approximately $205 million. As it relates to our financial guidance for the third quarter of 2021, we expect total revenue between $59.4 million and $62.4 million, and adjusted EBITDA losses between negative $7.5 million and negative $5.5 million. For the full-year 2021, we are raising our full-year outlook. We expect total revenue between $236.7 million and $239.7 million.

At their respective midpoints, this represents an increase of $8.6 million, compared to the full-year revenue guidance we provided last quarter. We also expect adjusted EBITDA losses between negative $12.5 million and negative $10.5 million. At their respective midpoints, this represents an improvement of $2.5 million compared to the full-year guidance we provided last quarter. Lastly, I will provide a few additional details related to our second half 2021 guidance.

First, as it relates to Twistle's financial impact in the second half of 2021, we anticipate revenue contribution of approximately $3 million, primarily in the technology segment, inclusive of a purchase accounting related deferred revenue write-down, along with approximately $3 million in adjusted EBITDA loss contribution. Next, as it relates to our professional services revenue, we anticipate Q3 and Q4 professional services revenue will be slightly down relative to Q2 2021, driven by lower forecasted non-recurring revenue. Additionally, I would mention that we anticipate our adjusted professional services gross margin percentage will be in the mid-20s for the second half of 2021, driven by our forecasted mix of services utilized, our anticipated utilization rates and lower non-recurring revenue than in the first half of 2021. Lastly, as implied by our guidance, we anticipate our adjusted EBITDA quarterly performance to be meaningfully lower in the second half of 2021 relative to the first half.

Driven by multiple factors, including the Twistle contribution of an approximately $3 million adjusted EBITDA loss, higher sales and marketing expenses of over $3 million, mostly driven by our Healthcare Analytics Summit and our HIMSS conference participation in Q3, the lower professional services gross margin forecast mentioned previously, additional ramp and forecasted travel expenses, the seasonality in some of our other non-headcount expenses mentioned previously, and the onetime acquisition-related integration expenses that we described in our Q4 2020 earnings call. And as an additional note, excluding our Twistle acquisition, our updated full-year 2021 adjusted EBITDA guidance represents a meaningful improvement from our previous full-year 2021 guidance by approximately $5.5 million. With that, I will conclude my prepared remarks. Dan?

Dan Burton -- Chief Executive Officer

Thanks, Bryan. In conclusion, as I always do, I would like to thank our highly engaged team members. Without their consistent contributions to our mission and growth, none of this would be possible. And with that, I'll turn the call back to the operator for questions.

Questions & Answers:

Operator

Thank you. We'll now begin the question-and-answer session. [Operator instructions] And our first question is from Annie Samuel from J.P. Morgan.

Annie Samuel -- J.P. Morgan -- Analyst

Hi guys. Thanks for taking the question. We've been hearing a lot about improving hospital utilization this quarter. And I was wondering if maybe you could speak to how that's impacting the demand environment, and if that's driving any incremental conversations for you.

Dan Burton -- Chief Executive Officer

Absolutely. Thanks for the question, Annie. We are seeing also within our client community a focus on increasing hospital utilization. And that broadly fits often within the financial application suite category of the work that we do on the technology side, as well as the services that we provide in helping these health systems really get to get back toward pre-pandemic levels of utilization.

And we have seen meaningful progress there that has directly contributed to the financial performance improvement that many of our clients are experiencing. Bryan, anything you'd add?

Bryan Hunt -- Chief Financial Officer

No. I think that's right, Dan. And just to add to that, Anne, one other dynamic that we do want to be cognizant of and our monitoring is we are seeing a little bit of that increase in COVID-related case counts as well in our hospital system and market with the rise of the Delta variant. So that's also a dynamic that's creating a little bit more of that uncertainty as well in the market in addition to the increase in utilization.

So we'll continue to monitor that situation as well.

Annie Samuel -- J.P. Morgan -- Analyst

Great. Very helpful color. Thank you.

Operator

And our next question is from Ryan Daniels from William Blair.

Ryan Daniels -- William Blair & Company -- Analyst

Yeah, guys. Congrats on the quarter and thank you for taking the questions. Dan, maybe a big picture, one for you. You mentioned in your prepared comments, you're seeing more of an acceleration to value-based care, and I guess that's natural given the pandemic and pressures we saw in fee-for-service, as well as kind of the government and payer push to move to value-based care.

So I'm curious if you could talk a little bit about how that's changing your longer-term investment philosophy? Obviously, it's led to some recent M&A activity to bolster your offering, but how it's changing your investment philosophy for M&A and internal investments? And also, maybe how that's changing your sales or go-to-market approach with clients? Thank you.

Dan Burton -- Chief Executive Officer

Thanks for that question, Ryan. We are seeing a meaningful uptick, as we have mentioned in last quarter's earnings conference call in the population health areas. That is informing the way that we think about our own portfolio, our own investments, both from an R&D perspective, as well as from an M&A perspective. The recent acquisition of Twistle is a good example of this, where patient engagement is such an important component of care management and population health, we wanted to make sure we had a really robust industry-leading component to our population health solution suite.

We also mentioned in our last earnings conference call that as it relates to our pipeline, one of the most active areas in our conversations is in the population health category. And so, we're paying attention to what is most needed. It does make sense for your comments, Ryan, that there's been a meaningful shift in focus here. And we have consistently been investing from an R&D perspective, as well as evidenced in the recent announcement of our value optimizer application within that pop health application suite, and we anticipate continuing both from an R&D perspective to meaningfully invest in this suite, as well as to keep our eyes open from an M&A perspective.

Bryan, anything you'd add?

Bryan Hunt -- Chief Financial Officer

Yeah. To add to that -- thanks, Ryan, for the question. In terms of the go-to-market kind of approach and strategy, so one of the earlier phases of the post-Twistle integration work will be integrating from a sales and marketing and a messaging standpoint going forward such that we're able to, as Dan mentioned, provide that comprehensive sales message and solution in conversations going forward. So that is something that we're focused on in the second half of the year from an integration standpoint and then obviously, the further integration in terms of the technology will roll out a little bit more over time.

Ryan Daniels -- William Blair & Company -- Analyst

OK. That's helpful. And then, in regards to the margin performance, congrats on hitting adjusted EBITDA breakeven, just trying to dig a little bit into the sequential decline. I appreciate some -- the conference and travel, HIMSS, higher operating expenses for delayed hiring.

The one I'm trying to get a better handle on is just the services revenue line. How much of the business is kind of unexpected onetime during the quarter that won't repeat just so we can calibrate our models right?

Bryan Hunt -- Chief Financial Officer

Definitely, yes. So you could think about that in Q2 of approximately $1.5 million of incremental unanticipated professional services revenue. That's more non-recurring in nature. So we do expect that to roll off going forward, but we'll still have some growth more on the recurring side for professional services in the back half of the year.

Ryan Daniels -- William Blair & Company -- Analyst

OK, perfect. Thank you so much, guys. Have a great night.

Bryan Hunt -- Chief Financial Officer

Thank you.

Operator

Our next question is from Sean Wieland from Piper Sandler.

Sean Wieland -- Piper Sandler -- Analyst

Hi. Thanks so much. I may have just misheard you. Did you say 9.5 million, or 1.5 million in non-recurring professional services?

Bryan Hunt -- Chief Financial Officer

Yeah, good clarification. 1.5 million.

Sean Wieland -- Piper Sandler -- Analyst

1.5. Good to know. Thank you. And so, to follow up then on the line of question, what's the nature of this non-recurring professional services? Is it a single client? Was it something across the industry? And you had some nice operating leverage with that extra 1.5 million of services revenue.

So why would that non-recurring professional services carry a higher margin?

Dan Burton -- Chief Executive Officer

Yeah. Sure. So we see more of the non-recurring services falling into a project-based relationship on a specific area of focus. And we have multiple clients that have engaged our professional services teams more in that project-based engagement.

And that's what we've seen making up the majority of the non-recurring services revenue, and we try to be responsive to clients as they're facing a specific problem that sometimes a project-based services model is a better solution where it's a finite period of time, and it's a focused effort. Those, as you might imagine, are a little bit harder to forecast. And so, we try to have enough of a bench in place from a professional services perspective to be responsive to those needs. But that is something that is a little bit more difficult to forecast.

Bryan, anything you'd add?

Bryan Hunt -- Chief Financial Officer

Yeah. And to your point, Sean, on the operating leverage and kind of margin profile of those. So we did mention that we were a little bit slower in our hiring in the quarter and in the first half. And so, that means is that our, to Dan's point, on the bench and the utilization rate of our team members was a little bit higher than what would be ideal.

And so, that's what's driving some of that gross margin outperformance. And we do expect to be able to catch up a little bit on the hiring front and kind of points to the commentary in the back half of the year around that lower professional services gross margin going forward.

Sean Wieland -- Piper Sandler -- Analyst

That's helpful. And then, one more, if I could. The whole opportunity around price transparency, you bought Vitalware about a year ago. Are you seeing -- are any of your customers actually taking this seriously? And are they looking at addressing that regulation?

Dan Burton -- Chief Executive Officer

Yeah. Thank you for asking that, Sean. With the recent increase in the penalties -- a meaningful increase in the penalties as it relates to price transparency, we view all of our health system clients is taking this seriously. And as we've discussed in prior quarters, the ability to be compliant with guidelines that need further clarification, and we're all anxious.

I think the entire industry is anxious to hear the updated CMS guidelines that are coming out in another week or so to better understand exactly what is needed to be compliant is something that we're focused on. It certainly is increasing the demand for solutions like our solution. It also is increasing the consequences of noncompliance. And so, we're also trying to be really sensitive to make sure we're investing in understanding guidelines that haven't always been crystal clear and are difficult to implement, difficult to track, very complex to comply with.

But our goal is to be on the front end, on the high end of compliance for the industry. Though it's a really difficult complicated issue to manage.

Sean Wieland -- Piper Sandler -- Analyst

That's great. Thank you very much.

Dan Burton -- Chief Executive Officer

Thanks, Sean.

Bryan Hunt -- Chief Financial Officer

Thanks, Sean.

Operator

Our next question is from Elizabeth Anderson from Evercore.

Elizabeth Anderson -- Evercore ISI -- Analyst

Hi, guys. My first question is in the population health. Thank you for talking about the broader capabilities there. Are there any additional areas that you feel like you want to sort of bulk up now or do you feel like you have kind of the broad perspective and sort of offerings there that you need?

Dan Burton -- Chief Executive Officer

Yeah. Thanks for that question. I think we're pleased to see the breadth of our offering meaningfully increasing both in terms of the M&A of Twistle, adding really meaningful patient engagement capabilities, as well as the recent product release of value optimizer. And one of the differentiation elements that Health Catalyst has is our breadth of offering.

There are a number of other options out there that have real depth in one specific area of population health, but a few that have the breadth that Health Catalyst can offer. And so, we are focused on the broad population health ecosystem. And we're pleased with where we are, but we do see other opportunities to keep broadening that portfolio that we can bring, the solution set that we can address. And feel that that's important given that that's one of our key differentiators.

Elizabeth Anderson -- Evercore ISI -- Analyst

OK. That's really helpful. And is there anything you could comment about the pacing of stock comp in the back half of the year versus the first half?

Bryan Hunt -- Chief Financial Officer

Yeah. Thanks, Elizabeth. So we mentioned on our prior earnings call, the uptick that we expected for Q2 in stock-based comp. Part of that is related to some revested acquisition consideration, that flows through that line item and will roll off through 2021.

But a good way to think about it generally is that we'd expect, excluding that stock-based comp to look pretty similar through the back half of 2021 is what you see in Q2. Over the long term, we do anticipate continuing to drive operating leverage in that expense item over time.

Elizabeth Anderson -- Evercore ISI -- Analyst

Got it. OK. Thank you.

Dan Burton -- Chief Executive Officer

Thank you.

Operator

Our next question is from Stephanie Davis from SVB.

Stephanie Davis -- SVB Leerink -- Analyst

Hey, guys. Congrats on the quarter and thank you for taking the question as always.

Dan Burton -- Chief Executive Officer

Hey, Stephanie.

Stephanie Davis -- SVB Leerink -- Analyst

We've heard a lot about your competitiveness against the other analytics players. But I was actually hoping to hear about your competitive dynamics on the other side of the world where you guys are an acquirer. Just because M&A is becoming a bigger part of your model, as you mentioned in your prepared remarks, how do you differentiate yourself versus the other potential acquirers in the data analytics universe? And what sort of annual integration capacity do you have within the model?

Dan Burton -- Chief Executive Officer

Yeah, great question, Stephanie. So I want to first acknowledge this is a very competitive environment from an M&A perspective. We're certainly seeing valuation multiples that are higher this year than they were last year. And so, one of the elements that we focused on is making sure we have a strong balance sheet always and the right capital structure so that we can be competitive from a financial perspective.

So that's certainly one element that we'll always be paying attention to. I think another element that has served us well from a differentiation perspective, including recently, is the fact that Health Catalyst is the best place to work. And often, given the recognition of the company over 60 times is best place to work, the team members at these various companies are hoping that Health Catalyst is successful. And I think also the fact that Health Catalyst really takes care of customers and has among the highest customer satisfaction of the industry, is another reason why we tend toward being successful as long as we're competitive from a financial perspective.

And so, we're going to keep that focus as it relates to our team members, and the proof is always in the pudding. And so, that relates to your last question about our integration capacity. There are no shortcuts as it relates to team member integration and team member engagement. That includes the team members that come to us from these acquisitions.

We need to make sure we're taking care where we know each of these team members. We're listening to them. We're ensuring that the integration is really positive. And there is a ceiling to what we can do at a world-class level in terms of that integration.

So we're mindful of that. I think our experience as a publicly traded company, these last two years are a good example of us trying to pace ourselves from a balance perspective and not get to that ceiling of being able to perform integration really effectively. And since we've gone public, we've had two acquisitions as a company over the last two years. And we think that pace has been sustainable.

It's been a meaningful amount of work, but it's been sustainable. And we do see Health Catalyst long term as a consolidator, especially at the apps layer with meaningful, hundreds of meaningful opportunities and companies, most of whom are start-ups that aren't likely to make it long term as independent companies but would be a really nice addition to Health Catalyst's breadth of portfolio that tends to be a differentiator for us. And likewise, in adjacent markets, we continue to want to pay attention in life sciences internationally to M&A opportunities, all within the construct of trying to be world-class in that regard, including the integration experience.

Stephanie Davis -- SVB Leerink -- Analyst

So with that in mind, as you are kind of more of the acquirer of choice, what areas would you look at as either too much of a reach on time or cost to develop in-house where you might want to really accelerate your M&A strategy?

Dan Burton -- Chief Executive Officer

Yeah. So we continue to look at the apps layer, the middle section of the three components of our solution as the most promising area.

Stephanie Davis -- SVB Leerink -- Analyst

That's a broad space, right?

Dan Burton -- Chief Executive Officer

It's a broad space, yes. And so, more specifically, as was mentioned just a few minutes ago, we see population health as a very important area to our clients. And so, we're paying attention, continuing to pay attention in the pop health space. Also, the CFO value proposition, so the revenue and cost analytics space continues to be really important as per the utilization question earlier.

So that's a second area that we pay attention to. And then, those adjacent markets that we've discussed many times before, life sciences is an interesting area for us, as well as international.

Stephanie Davis -- SVB Leerink -- Analyst

Super helpful. Thank you.

Dan Burton -- Chief Executive Officer

Thank you, Stephanie.

Operator

Our next question is from Richard Close from Canaccord Genuity.

Richard Close -- Canaccord Genuity -- Analyst

Great. Thanks for the questions. Congratulations on the quarter. I was wondering if you could go over the gross margin commentary again.

I think you said something about some headwinds associated with transition into the cloud. Can you just go over the details of that? And where are you in that process and what happens when you're done, from a margin perspective?

Bryan Hunt -- Chief Financial Officer

Yeah. Certainly. So as backdrop for the -- on the technology gross margin side, given the nature of our technology solution, which starts with a data platform, where we begin with kind of ingesting the bulk of the data needs for a customer kind of from the start of the relationship. And then, over time, as that relationship grows on the technology side through our expansion mechanisms, what we typically see is on a per customer cohort basis, we see technology expansion over time, typically, as that grows, and that the revenue base does not grow commensurate with the hosting cost and support increase.

That's what we expect long term and kind of ties into our long-term technology gross margin targets as well. However, to offset that in the short term, as you mentioned, we do have a bit of a headwind, which is we still have a handful of customers who are transitioning from on-premise deployments to cloud-based deployments. And so, that increases our hosting cost for those customers and kind of offsets that natural gross margin expansion over time. So we shared on a prior earnings call that we did expect that to continue -- that transition to continue through 2022.

And then, at that point, we'd expect to see that more natural technology gross margin expansion on an annual basis.

Richard Close -- Canaccord Genuity -- Analyst

OK. Thank you.

Dan Burton -- Chief Executive Officer

Thank you.

Operator

And our next question is from John Ransom from Raymond James.

John Ransom -- Raymond James -- Analyst

Hi. I just wanted to get your math on -- if we look at your revised full-year '21 guidance, how will we think about the organic growth versus what you have brought in for M&A?

Bryan Hunt -- Chief Financial Officer

Yeah. So in terms of the organic growth, we provided some commentary earlier in the year as it relates to the Vitalware contribution of revenue for 2021. And that was in the low 20 million of revenue for the year. And then, on this call, in terms of the Twistle contribution to revenue, we mentioned approximately 3 million of revenue contribution in the second half of the year.

So hopefully, that helps, John, in terms of the components that you can think about as compared to our core business, excluding those two items.

John Ransom -- Raymond James -- Analyst

Was there anything that wrapped around from last year that we're not thinking about?

Bryan Hunt -- Chief Financial Officer

I think those two would be the main items. Yes, Vitalware and then the Twistle contribution.

John Ransom -- Raymond James -- Analyst

And when you are looking -- I mean, the great tech companies, as you know, are all built on a common backbone and the ones that just cobbled together much tend to fail. So when you go out and buy one of these point solutions and you integrate it into your backbone, what's the -- what's kind of the heavy lifting behind the scenes to make sure all the technology runs on a single engine?

Dan Burton -- Chief Executive Officer

Yeah, it's an important question. Thank you for bringing it up, John. And it's one of the reasons why our M&A is actually not focused at the platform layer. But that backbone, the data platform is something that we have prioritized building ourselves for precisely the reasons that you outlined from an architectural perspective.

So we agree with that assessment. What we want to make sure the platform is good at is feeding data up to the apps layer. And at the apps layer, the technology integration lift is much lighter between platform and apps, and you can operate different app categories fairly independently from one another. We still want a common look and feel and other common elements from an architectural security perspective, etc.

But there's more flexibility at the apps there. And that's why we focused our M&A at that layer and not elsewhere.

John Ransom -- Raymond James -- Analyst

That makes sense. And I think you said earlier that your hospital clients in the U.S. are building out their budgets in the fall for next year. Are you getting any early signals at all that things might be improving for their capital spend in 2022?

Dan Burton -- Chief Executive Officer

Yeah. So we're monitoring that situation. As we mentioned in our prepared remarks, we're seeing a pipeline set of behaviors that does continue to feel, as we've shared in prior calls as well, more like those pre-pandemic pipeline dynamics and levels. That seems to be the result of both headwinds and tailwinds that are associated with COVID-19 that there are still some headwinds.

And I do want to note that we are monitoring the Delta variant carefully, and it is difficult to predict exactly how that will play out. We're continuing to support our health system clients and focusing a great deal on persuading as many individuals as possible to get fully vaccinated as the data is overwhelmingly positive as it relates to the protective benefits of vaccination. But it is hard to predict how the Delta variant will play out, and there still are some other related distraction factors as it even still relates to the continuation of the vaccination rollout logistics, for example. But there are also tailwinds where we are seeing because the percentage of Americans, for example, that are at least partially or are also fully vaccinated, is growing and is a meaningful percentage of the total population.

This wave thus far has not been as serious as prior waves -- prior recent waves in terms of the hospitalization rates that were required to respond to COVID. And so, we're seeing tailwinds in the recognition of the importance of robust data and analytics. Tailwinds as it relates to the opportunity for a little bit more sense of normalcy in capital planning and budgeting. But it is a dynamic environment and Delta -- the Delta variant is hard to predict.

So we're monitoring the situation as it unfolds.

John Ransom -- Raymond James -- Analyst

I guess, my -- this is a hard question to answer, but we all look at the public hospital chains and they're just doing great. Stocks are at an all-time high, their EBITDA is setting new records. Is there any way for you to like -- your sort of qualitative assessment with your not-for-profit clients, are they -- are the higher-end systems doing as well in real time as far as you can tell as some of the public hospital chains, or are the not-for-profits for various reasons, maybe lagging a little bit in terms of their operating performance?

Dan Burton -- Chief Executive Officer

We have seen a meaningful improvement relative to last year, certainly, as you would expect in terms of the financial performance of our not-for-profit health systems, and we serve some for-profit hospitals as well. And so, we have definitely seen improvement. I think it depends on the area of the country where there are some hotspots where in areas where the vaccination rate is much lower, there's a much more significant hospitalization rate, hospital utilization rate specifically focused on COVID, and that is an issue for some of our health system clients in the south and in other specific areas where those hotspots are emerging. And so, it depends on which part of the country.

But generally speaking, absolutely, there has been improvement, certainly since last year. And that could continue, but it is hard to predict exactly how the Delta variant will play out.

John Ransom -- Raymond James -- Analyst

All right. Thanks so much.

Dan Burton -- Chief Executive Officer

Thank you.

Operator

Our next question is from David Grossman from Stifel.

David Grossman -- Stifel Financial Corp. -- Analyst

Good afternoon. Thank you. Dan, I thought I heard you reiterate your bookings target for the year? And if I heard that right, given how important the second quarter is to achieve that number, perhaps you can give us some at least qualitative context on what you saw in terms of 2Q bookings? And maybe in the same breath, you could talk a little bit about the service attach rates and how they're trending on some of the newer deals?

Dan Burton -- Chief Executive Officer

Yeah, absolutely. David. Thank you for the question. So we have been encouraged by the financial performance of the company in the first half of the year, in Q1 and Q2, to see the meaningful pipeline activity, meaningful bookings activity.

And as we continue forward, that has increased the confidence level that the management team feels in reiterating that bookings guidance for the full year. However, it's important also to recognize that there is seasonality to our business and that there is some difficulty associated with COVID still being here. The Delta variant still being a factor that's hard to fully predict and forecast that clouds our view to some degree. As I mentioned just a few minutes ago, we do see some meaningful causes for optimism from a tailwind's perspective, but we also are experiencing some headwinds.

And so, all of those elements are factoring in. As of what we know right now to a sense that on balance, we feel comfortable with where we are in being -- in tracking toward those full-year guidance comments that we've made previously.

Bryan Hunt -- Chief Financial Officer

Yeah. And to add to that, David, I would just point out in some of the areas that Dan mentioned in the remarks in terms of focus areas are certainly applicable in the first half of the year. So population health, revenue and cost optimization where we feel like we're well suited for those solutions, and including on some of our recent acquisitions, seen a little bit of early success in terms of cross-sell, in particular, as it relates to apps to DOS customers, which is a lower price point, a slightly shorter sales cycle. So encouraging signs there as well and in line with kind of the commentary that we expected at the beginning of the year, but we did foresee some moderate amount of contribution from that front as well.

David Grossman -- Stifel Financial Corp. -- Analyst

And any sense for the attach rates on the service business and how they're trending on your newer pieces of business more in line with what you've seen historically or more in line with what you saw during the pandemic years -- or the pandemic quarters, I'm sorry.

Dan Burton -- Chief Executive Officer

Yeah. I would say they feel more like pre-pandemic experiences with one note that as we mentioned in our prepared remarks, we did see incrementally more services as it relates to the non-recurring project-based engagements than we had forecasted. And so, we're watching that dynamic in the future. And that is a little bit harder to predict, but that was one dynamic that came in a little bit stronger than what we had forecasted.

David Grossman -- Stifel Financial Corp. -- Analyst

Right. And if you don't mind, can I just squeeze in one more. If I understood your guidance right, it looks like revenues are going to be flattish, 3Q and 4Q. Am I getting that right? And if I am, is that the professional services piece that's driving that? Or is there something else going on?

Bryan Hunt -- Chief Financial Officer

Yeah. So in terms of the sequential dynamic for Q3, Q4, maybe I'll comment in terms of the segment. So we do expect technology revenue to uptick on a quarterly basis, including -- excluding the Twistle contribution, which would be incremental in Q3, Q4. You can think about technology sequentially growing at a few percentage points, excluding the Twistle contribution.

On the professional services side, you could think about that in Q3 as being impacted by that 1.5 million roll off of the non-recurring services with some modest growth in terms of just the underlying recurring services. So I think it's fair to think about sequential growth in both Q3 and Q4.

David Grossman -- Stifel Financial Corp. -- Analyst

Yeah, that's great. Thanks very much.

Dan Burton -- Chief Executive Officer

Thanks, David.

Operator

Our next question is from Daniel Grosslight from Citi.

Daniel Grosslight -- Citi -- Analyst

Hi, guys. Thanks for taking my question. I'll add my congrats on the strong quarter here. I'd like to stick with the cross-sell opportunity that you just mentioned.

So it's an understanding when an existing DOS client adopts the applications that you've recently acquired, that resulted in an upsell charge even for the all-inclusive DOS clients. So you get kind of an organic and inorganic benefit from those acquisitions at the app layer. Can you help dimensionalize the number of existing DOS clients that have purchased the acquired apps and how we should think about that flowing through to tech dollar-based retention this year, given the strength you've seen in both RCM and pop health?

Dan Burton -- Chief Executive Officer

Yeah. Certainly. I'll share a few thoughts, and then Bryan, please add to them as well. So we -- as Bryan mentioned, we are encouraged to see some early signs of a few examples of clients that are DOS subscription clients that have chosen to adopt some new applications that came to us through M&A.

So we do have -- we have multiple examples of that now where that has happened. And I would validate the way you described the default position that we would have would be -- that would be an incremental revenue opportunity from a technology revenue perspective. It isn't always the way that it plays out. We can always choose to do something else, but that is the default position that it does represent incremental technology revenue.

So we're excited about that. And the cross-sell, as Bryan mentioned, a DOS client adopting a new app is a lower price point, it's a little bit easier from a cross-sell perspective than the other direction where you take someone who's only a customer through the use of one app that we've -- through a company that we've acquired. The DOS value proposition takes longer and it's a much larger price point. So that takes a while longer.

We're working on light versions of DOS, as we've described in prior earnings calls, and we see some encouraging signs in our pipeline, but that's typically going to take longer to play out. But we do -- we did forecast a modest amount of cross-sell success into our 2021 forecast. And so, we are assuming and forecasting that there will be some contribution that results from cross-sell into that tech dollar-based retention overall for 2021. What would you add, Bryan?

Bryan Hunt -- Chief Financial Officer

Yeah. And just to quantify that a little bit more, Daniel. So in terms of the technology dollar-based retention rate color that we provided for 2021, we had shared that we expected that to be robust in line with historical performance of that 107% to 109%. And you could think about the cross-sell contribution there included as a point or so of that metric.

Daniel Grosslight -- Citi -- Analyst

OK. So you're still thinking of tech dollar-based retention in that same historical range?

Bryan Hunt -- Chief Financial Officer

That's right, yes. And then, if we were to drive significant cross-selling, that could be some upside, but currently in line with our bookings expectations for the year.

Daniel Grosslight -- Citi -- Analyst

OK. And you made a comment on the life sciences front. I think it's one of the more underappreciated opportunities for you guys. I was wondering if you can just dig in a little more on what specifically in life sciences you're getting the most interest in? And if that's a buy or build opportunity?

Dan Burton -- Chief Executive Officer

Yeah. Thank you for asking. So we still very much view, Daniel, our presence in life sciences as very early and that this is a long-term opportunity for Health Catalyst, but that it will take many years to play out. So that's probably the first important objective response there.

And we have, to date, been investing organically as a company and building out some capabilities and the specific use cases that we have seen interest in includes the ability to build out registries given our core market work with hundreds of health systems that provide care for over 100 million patients. And often because of the work that we do around clinical and quality improvement, it's a very clinically rich data set. And so, in the case of COVID, for example, wanting to understand and study COVID, our ability to build registries around specific use cases or populations that were impacted by COVID was positive. And other opportunities to build out registries that could be relevant in clinical trial recruitment are areas where we feel like long term, there's an opportunity for us.

And so, we'll continue to invest organically as a company. And as we've mentioned multiple times, we also include in our pipeline of M&A opportunities, adjacent market opportunities in the life sciences space as well.

Bryan Hunt -- Chief Financial Officer

And just to add to that point on kind of inorganic opportunity there. Just to call out that with the Twistle acquisition, we did mention, as part of that announcement, that they do have a small presence in the life sciences space, relevant in terms of tracking medication adherence and medical device adherence and the like. And so, that's also something, as Dan mentioned, that we'll continue to think through, over the long term, how that contribution might factor into our life sciences strategy.

Dan Burton -- Chief Executive Officer

And one other note. Long term, as we think about the markets, where we might find longer-term differentiation, I would include real-world evidence as a category where we just have a rich data set and meaningful analytics that can contribute to real-world evidence use cases as well.

Daniel Grosslight -- Citi -- Analyst

Got it. Thanks, guys.

Dan Burton -- Chief Executive Officer

Thank you. 

Operator

Our next question is from Iris Long from Berenberg.

Iris Long -- Berenberg Capital Markets -- Analyst

Hi. Good afternoon, team. Thanks for taking my question. So first, a big-picture question for Dan.

So after the Twistle acquisition, can we get an updated view on your thoughts about the total addressable market? I'm wondering, have you reassessed the TAM internally? And then I'm also curious, how many Health Catalyst existing customers already have some sort of patient engagement solution? I'm just curious how this patient engagement population health solution may change your view on the long-term TAM.

Dan Burton -- Chief Executive Officer

Yeah. Thank you for the question, Iris. So at a big picture level, we have not updated the TAM for the company, but we do anticipate likely, I think, at the beginning of next year, we're going to take a step back. It will have been two and a half years since the company went public and reassessed some of these areas.

So for example, when we went public, we had eight application areas where we had a solution. Today, we have 12. And the addition of those four have come from one product introduction that we built organically. And three of the acquisitions, one of which being the recent Twistle acquisition, and each time that occurs, certainly, the total addressable market increases, but we have not yet updated that overall TAM.

And as it relates to our existing customers and their response to Twistle and whether they already had a solution in place, I would characterize with a couple of thoughts. One, we certainly have observed many customers, many health systems feeling the threat of other new entrants into the space, trying to disrupt that direct relationship between the clinician and the patient. And so, they have been very interested in this space and focused on this space and having scalable ways to maintain that relationship is very important to our health system customers. Many of them do not have a solution in place today or they have some kind of patchwork solution that they have developed themselves or there are some players, smaller players that offer some form of patient engagement.

But we're relatively early in the industry adoption of scalable patient engagement capabilities. And we saw that and wanted to make sure that we found a very scalable solution from a technology perspective that automates processes that are often manual so that they can scale. And we're excited to see our -- the early response of our health system customers and being very interested in this capability.

Iris Long -- Berenberg Capital Markets -- Analyst

Great. And then, a follow-up question to that, maybe for Bryan. I'm wondering if you can comment on the revenue model for Twistle? Is it a subscription base, maybe by number of modules or service line? And then in terms of the sales cycle and the contract length, what does that look like?

Bryan Hunt -- Chief Financial Officer

So the contract and sales model is a subscription-based model. So technology subscription to the Twistle software with a small amount of implementation services in terms of total contract value. Contract terms are kind of typical with what you'd expect, tend to be multiyear technology subscriptions. And in terms of -- what was your last question? Sorry, there, Iris?

Iris Long -- Berenberg Capital Markets -- Analyst

Sales cycle.

Bryan Hunt -- Chief Financial Officer

Sales cycle. Yes. In terms of the sales cycle, so it's kind of in line with what you'd expect with more of the application suite type sales cycle relative to our DOS sales cycle. So it does tend to be shorter than our average sales cycle for DOS, which is approximately a year, just given the lower price point and then ultimately selling into a slightly lower level of an organization compared to our DOS offering.

Iris Long -- Berenberg Capital Markets -- Analyst

Great. Thank you.

Dan Burton -- Chief Executive Officer

Thank you.

Operator

And we have no further questions at this time.

Dan Burton -- Chief Executive Officer

All right. Thank you, everyone, for your continued interest in Health Catalyst, and we look forward to keeping in touch. Take care.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Adam Brown -- Senior Vice President of Investor Relations and Financial Planning and Analysis

Dan Burton -- Chief Executive Officer

Bryan Hunt -- Chief Financial Officer

Annie Samuel -- J.P. Morgan -- Analyst

Ryan Daniels -- William Blair & Company -- Analyst

Sean Wieland -- Piper Sandler -- Analyst

Elizabeth Anderson -- Evercore ISI -- Analyst

Stephanie Davis -- SVB Leerink -- Analyst

Richard Close -- Canaccord Genuity -- Analyst

John Ransom -- Raymond James -- Analyst

David Grossman -- Stifel Financial Corp. -- Analyst

Daniel Grosslight -- Citi -- Analyst

Iris Long -- Berenberg Capital Markets -- Analyst

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