Health Catalyst, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Health Catalyst provides cloud-based healthcare data platforms, analytics applications, and professional services primarily to healthcare providers. The filing covers the unaudited three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $74.7 million | $73.9 million | Up 1% |
| Technology revenue | $47.0 million | $47.2 million | Down less than 1% |
| Professional services revenue | $27.8 million | $26.7 million | Up 4% |
| Gross profit | $29.3 million | $28.2 million | Up 4% |
| Gross margin | 39% | 38% | Up 1 percentage point |
| Net loss | $20.6 million | $33.2 million | Improved $12.6 million |
| Net loss per share | $0.35 | $0.60 | Improved |
| Adjusted EBITDA | $3.4 million | $4.2 million | Down $0.8 million |
| Adjusted gross profit | $38.3 million | $38.4 million | Down slightly |
| Adjusted gross margin | 51% | 52% | Down 1 percentage point |
| Net cash from operating activities | $10.3 million | $(5.6) million | Improved $15.8 million |
Technology represented 63% of revenue and professional services represented 37%. The company states that more than 90% of revenue is recurring in nature.
Financial position, debt, and liquidity
- Cash and cash equivalents were $201.4 million at March 31, 2024, compared with $106.3 million at December 31, 2023.
- Short-term investments were $126.4 million, resulting in total cash, cash equivalents, and short-term investments of $327.8 million.
- Convertible senior notes had a $230.0 million principal balance and a $228.4 million carrying value. The 2.50% notes mature April 15, 2025; holders may convert under specified conditions. The notes were not currently convertible as of March 31, 2024.
- Management believes existing cash, cash equivalents, and marketable securities are sufficient for working capital and capital expenditure needs for at least the next 12 months.
- The $40.0 million share repurchase authorization had $29.8 million remaining at March 31, 2024. No shares were repurchased in Q1 2024.
Material changes versus the prior comparable period
- Revenue increased modestly as professional services growth more than offset a slight decline in technology revenue. Management attributed the technology decline primarily to elevated churn, partially offset by new clients, contractual escalators, and expanded support services.
- Professional services revenue increased primarily from implementation, analytics, improvement services, and Tech-enabled Managed Services.
- Gross margin improved to 39% from 38%, while adjusted gross margin declined to 51% from 52%.
- Professional services gross margin improved to 16% from 12%, and adjusted professional services gross margin improved to 22% from 20%, primarily due to higher utilization and cost management following workforce reductions.
- Adjusted technology gross margin declined to 68% from 70%, reflecting higher Microsoft Azure hosting costs and migration costs related to Health Catalyst Ignite.
- Research and development expense declined 13% to $14.9 million, and general and administrative expense declined 39% to $14.6 million. The prior-year period included $11.7 million of litigation expense related to the Pascal Metrics settlement.
- Q1 2024 included a $2.2 million impairment charge related to office space designated for subleasing and $1.8 million of restructuring costs. The company recorded $2.1 million of restructuring costs in Q1 2023.
- Operating cash flow improved to $10.3 million from negative $5.6 million, primarily due to working-capital changes, including accounts receivable and deferred revenue.
Guidance, outlook, commentary, and risks
- Management expects 2024 professional services revenue growth to slightly outpace technology revenue growth, driven by Tech-enabled Managed Services bookings and anticipated churn in offerings without near-term measurable financial return on investment.
- The company expects bookings, dollar-based retention, net new DOS Subscription Client additions, and aggregate churn levels to improve relative to 2023, while noting that the macroeconomic environment remains challenging.
- Existing DOS Subscription Clients are expected to migrate to Health Catalyst Ignite over the next two to three years. Management expects a near-term margin headwind from migration costs and a medium-term technology gross-margin benefit.
- Management expects adjusted operating expenses as a percentage of revenue to trend lower and annual Adjusted EBITDA to improve, although quarterly results may fluctuate due to seasonality and non-recurring items.
- Healthcare clients continue to face labor, supply-cost, budget, and operating-margin pressures. These conditions could reduce new business, expansions, renewals, collections, and demand for offerings that do not provide near-term financial return on investment.
- In early May 2024, client Steward Health Care filed for Chapter 11 bankruptcy. As of March 31, 2024, its outstanding balance represented approximately 12% of Health Catalyst’s accounts receivable. The company stated that it could not yet predict the resulting credit loss, if any.
- Key ongoing risks include competition, client churn and pricing pressure, long sales cycles, execution of restructuring and platform migrations, reliance on Microsoft Azure and other third parties, cybersecurity and data-privacy compliance, healthcare regulation, intellectual-property claims, and the ability to repay or refinance the 2025 convertible notes.
Important facts for investors to verify
- Assess the collectability and potential credit loss associated with Steward Health Care’s bankruptcy filing.
- Track renewal rates, dollar-based retention, churn, new-client additions, and the mix of recurring technology revenue versus professional services revenue.
- Evaluate whether Health Catalyst Ignite migrations and Azure hosting transitions deliver the expected medium-term margin benefits without disrupting clients.
- Monitor cash usage, operating cash flow, the April 2025 convertible-note maturity, and any refinancing or repayment plans.
- Reconcile GAAP losses with Adjusted EBITDA and Adjusted Gross Profit, particularly the effects of stock-based compensation, restructuring charges, lease impairments, acquisition costs, and other exclusions.
- Review the sustainability of cost savings from the approximately 10% workforce reduction and the potential effect on service quality, employee retention, and growth execution.
- Consider the company’s continuing accumulated deficit, full valuation allowance on deferred tax assets, and reliance on existing liquidity while it remains unprofitable on a GAAP basis.