Health Catalyst, Inc. — Q1 2022 Form 10-Q Summary
Reporting period: Three months ended March 31, 2022; comparative period is the three months ended March 31, 2021. Health Catalyst provides cloud-based healthcare data and analytics technology, software, and professional services primarily to healthcare providers.
Financial Performance and Liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $68.1 million | $55.8 million | 22% |
| Technology revenue | $42.2 million | $33.8 million | 25% |
| Professional services revenue | $25.9 million | $22.0 million | 17% |
| Loss from operations | $(24.3) million | $(24.3) million | Approximately flat |
| Net loss | $(22.5) million | $(28.4) million | Loss narrowed by $5.9 million |
| Basic net loss per share | $(0.42) | $(0.65) | Improved |
| Adjusted EBITDA | $0.7 million | $(0.8) million | Improved by $1.5 million |
| Net cash from operating activities | $1.2 million | $(3.1) million | Improved by $4.3 million |
Technology represented 62% of revenue and professional services 38%. More than 90% of revenue was recurring. Adjusted gross profit was $37.2 million, with a 55% adjusted gross margin, compared with $30.3 million and 54% in the prior-year quarter. Adjusted technology gross margin increased to 70% from 69%, while adjusted professional services gross margin declined to 29% from 31%.
Sales and marketing expense increased 33% to $20.8 million, research and development increased 20% to $17.1 million, and depreciation and amortization increased 49% to $11.6 million, primarily due to acquired intangible assets. General and administrative expense declined 41% to $8.8 million, largely because of a favorable $8.4 million change in the fair value of contingent consideration liabilities and lower related expense.
Cash, cash equivalents, and short-term investments totaled $425.4 million at March 31, 2022, consisting of $198.4 million of cash and cash equivalents and $227.0 million of short-term investments. Cash and cash equivalents increased $5.2 million during the quarter to $198.4 million. Management stated that existing liquidity and available credit facilities should fund working capital and capital expenditure needs for at least the next 12 months, although additional capital may be required in the future.
Total assets were $824.9 million and stockholders’ equity was $480.9 million at March 31, 2022. The company had $230.0 million principal amount of 2.50% convertible senior notes due April 2025, recorded at a net carrying amount of $225.4 million. The notes were not convertible as of March 31, 2022 and are senior unsecured obligations.
Material Changes and Unusual Items
- Revenue growth reflected new customers, acquired technology customers, contractual annual escalators, expanded support services, and increased project-based professional services.
- Health Catalyst acquired KPI Ninja on February 24, 2022 for preliminary consideration of $21.4 million, including $18.5 million of cash and $2.9 million of common stock. The acquisition added approximately $10.4 million of goodwill and $15.4 million of identifiable intangible assets on a preliminary basis.
- On April 29, 2022, after quarter-end, the company acquired ARMUS Corporation for preliminary gross consideration of approximately $15.0 million, consisting of $9.0 million of cash and 241,449 common shares. The purchase price allocation remained preliminary.
- The company adopted ASU 2020-06 for convertible instruments on January 1, 2022. Adoption increased the convertible notes carrying balance by $44.0 million, reduced additional paid-in capital by $61.2 million, and reduced accumulated deficit by $17.2 million. It also reduced non-cash interest expense.
- Stock-based compensation increased to $18.1 million from $13.5 million and represented a significant non-cash expense. Outstanding unrecognized stock-based compensation totaled approximately $162.0 million across RSUs, performance awards, options, and restricted shares.
- The company settled the remaining Healthfinch contingent consideration during the quarter with $1.7 million of cash and 78,248 common shares. Total contingent consideration liabilities declined to $6.9 million from $19.3 million at December 31, 2021.
Outlook, Commentary, and Risks
Management expects near-term technology gross margin pressure from migrating a small number of customers from on-premise and managed data centers to Microsoft Azure. Azure hosting is expected to increase per-customer costs, although management expects technology cost as a percentage of revenue to decline over the longer term. The migration was expected to be substantially complete by the end of 2022.
Professional services margins are expected to fluctuate and potentially decline in the near term due to service mix and delivery overhead. Sales and marketing, research and development, and general and administrative expenses are expected to increase in absolute dollars as the company invests in growth, while management expects those expenses to decline as a percentage of revenue over the long term.
Management remains encouraged by customer interest in revenue and cost optimization analytics, value-based care analytics, and broader healthcare data modernization. The company also expects acquisitions and cross-selling opportunities to support growth, but noted integration costs, differing acquired-business growth profiles, and potential revenue declines from legacy Medicity customers.
Key risks include continued COVID-19 effects on healthcare providers and customer budgets, competitive pressure from healthcare technology, electronic health record, and analytics companies, long and unpredictable sales cycles, customer renewals and pricing, cybersecurity and protected health information exposure, dependence on third-party infrastructure including Microsoft Azure, data access and interoperability restrictions, healthcare and privacy regulation, acquisition integration, employee retention, potential impairment of goodwill and intangible assets, and the need to fund ongoing losses and repay or settle the convertible notes.
The filing reports no significant outstanding legal claims as of March 31, 2022 and no material changes to previously disclosed contractual obligations. Disclosure controls and internal control over financial reporting were assessed as effective at a reasonable assurance level.
Investor Verification Checklist
- Verify the sustainability of 22% revenue growth and the contribution from acquired businesses versus organic customer growth and contractual escalators.
- Monitor Azure migration costs, technology gross margin, and the 29% professional services gross margin.
- Reconcile adjusted EBITDA with GAAP net loss, particularly the effects of stock-based compensation, amortization, and contingent consideration remeasurement.
- Assess cash burn, acquisition spending, and liquidity relative to the $230.0 million convertible notes due in 2025.
- Review the final purchase accounting and operating contribution of KPI Ninja and ARMUS.
- Track customer retention, renewals, pricing, sales-cycle duration, and any pressure from healthcare-provider budget constraints.
- Evaluate cybersecurity, data privacy, third-party hosting, regulatory, and data-access developments that could affect customer retention or service delivery.