Health Catalyst, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Health Catalyst provides cloud-based healthcare data and analytics technology, software applications, and professional services primarily to healthcare providers. This Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $61.7 million | $47.2 million | $177.2 million | $135.6 million |
| Technology revenue | $38.3 million | $28.0 million | $107.6 million | $78.2 million |
| Professional services revenue | $23.5 million | $19.2 million | $69.6 million | $57.4 million |
| Net loss | $(40.0) million | $(27.3) million | $(104.2) million | $(72.0) million |
| Net loss per share | $(0.82) | $(0.68) | $(2.27) | $(1.87) |
| Adjusted EBITDA | $(5.8) million | $(6.4) million | $(5.0) million | $(16.6) million |
| Total adjusted gross margin | 51% | 51% | 53% | 50% |
Revenue increased 31% year over year in both the quarter and nine-month period. Technology revenue grew 37% in Q3 and 38% for the nine-month period; professional services revenue grew 22% and 21%, respectively. Technology represented 62% of Q3 revenue and 61% of nine-month revenue.
GAAP loss from operations was $42.2 million in Q3 and $98.9 million for the nine-month period. Depreciation and amortization increased to $10.7 million in Q3 and $26.6 million for nine months, primarily because of acquired intangible assets. Stock-based compensation was $17.5 million in Q3 and $48.7 million for nine months.
Adjusted technology gross margin was 70% in Q3 and 69% for nine months. Adjusted professional services gross margin was 20% in Q3 and 28% for nine months. Management defines adjusted gross profit and adjusted EBITDA as non-GAAP measures; these measures exclude selected items including stock-based compensation, depreciation and amortization, and acquisition-related costs.
Cash Flow, Liquidity, and Debt
- Cash and cash equivalents were $275.8 million at September 30, 2021, compared with $92.0 million at December 31, 2020.
- Short-term investments were $179.4 million, bringing cash, cash equivalents, and short-term investments to $455.2 million.
- Operating cash flow was negative $13.3 million for the first nine months of 2021, an improvement from negative $22.0 million in the comparable 2020 period.
- Investing cash flow was negative $63.0 million, including $46.8 million for the Twistle acquisition and $11.1 million for property, equipment, and intangible assets.
- Financing cash flow was positive $260.2 million, primarily from $245.2 million of net proceeds from an August 2021 public offering.
- The company had $230.0 million principal amount of 2.50% convertible senior notes due April 2025. The notes had a net carrying amount of $177.8 million and an estimated fair value of $402.9 million at September 30, 2021.
- The notes became convertible during the fourth quarter of 2021 because the stock-price conversion condition was met and were therefore classified as current liabilities at September 30, 2021. The initial conversion price was approximately $30.60 per share.
- Management stated that existing cash, cash equivalents, and marketable securities should be sufficient for working capital and capital expenditure needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased from $47.2 million to $61.7 million in Q3 and from $135.6 million to $177.2 million for the first nine months.
- Despite revenue growth, the Q3 net loss widened by $12.7 million and the nine-month net loss widened by $32.2 million, largely reflecting higher operating expenses, depreciation and amortization, stock-based compensation, and acquisition-related costs.
- General and administrative expense increased 73% in Q3 and 95% for nine months, primarily due to changes in the fair value of contingent consideration liabilities, higher stock-based compensation, additional personnel costs, and a lease-related impairment charge.
- Depreciation and amortization increased 114% in Q3 and 143% for nine months, primarily due to acquired intangible assets.
- Adjusted EBITDA improved from negative $6.4 million to negative $5.8 million in Q3 and from negative $16.6 million to negative $5.0 million for nine months.
- In July 2021, the company acquired Twistle for $91.9 million, consisting of $46.7 million in net cash, $43.1 million in common stock, and initial contingent consideration of $2.1 million. The acquisition added $61.8 million of goodwill and $36.7 million of identifiable intangible assets.
- The company completed an August 2021 public offering of 4.9 million shares at $53.00 per share, generating $245.2 million of net proceeds and increasing common shares outstanding.
- A $1.8 million impairment charge was recorded for subleased corporate office space.
Outlook, Management Commentary, Risks, and Unusual Items
Management expects an Adjusted EBITDA loss in the fourth quarter of 2021, citing anticipated travel expenses, the impact of the Twistle acquisition, potential one-time bonuses related to the tight labor market, and expected fluctuations in revenue and adjusted gross margin.
More than 90% of revenue was described as recurring. Management expects the near-term revenue impact of COVID-19 to remain relatively muted but noted continuing risks from healthcare-provider budget pressure, the Delta variant and potential future variants, customer collections, renewals, sales cycles, and professional services activity.
The company is transitioning customers from its private data center and on-premise environments to Microsoft Azure. Management expects the transition to be substantially complete by the end of 2022, but expects higher hosting costs and potential near-term pressure on technology gross margin. The filing also identifies risks involving competition, customer retention, data privacy and cybersecurity, healthcare regulation, third-party infrastructure, acquisitions and integration, employee retention, intellectual property, and the ability to fund or settle the convertible notes.
Other notable items include $16.8 million of acquisition-related costs for the nine-month period, $48.7 million of stock-based compensation, a $6.7 million income tax benefit primarily from a valuation allowance release associated with acquisitions, and $10.2 million of remaining contingent consideration liabilities at September 30, 2021. No significant outstanding litigation claims were reported, and management concluded that disclosure controls and internal control over financial reporting were effective at the reasonable assurance level.
Important Facts for Investors to Verify
- Confirm the sustainability of 31% revenue growth and the contribution from acquired businesses versus organic growth.
- Assess whether continuing operating losses, negative operating cash flow, and substantial stock-based compensation are improving at a sufficient rate.
- Evaluate the effect of the Microsoft Azure migration on technology gross margin, service reliability, and customer retention.
- Review the Twistle integration, acquisition-related expenses, contingent consideration, and potential future dilution from acquisition obligations.
- Monitor the $230.0 million convertible notes, which were classified as current because they became convertible in the fourth quarter of 2021.
- Assess liquidity relative to ongoing losses, potential cash settlement of note conversions or maturity obligations, future acquisitions, and other capital needs.
- Consider exposure to COVID-19, healthcare-provider spending, customer renewals, cybersecurity incidents, data privacy regulation, and third-party cloud infrastructure.
- Reconcile non-GAAP Adjusted EBITDA and adjusted gross margin with GAAP results, particularly the exclusions for stock-based compensation, acquisition-related costs, and lease-related charges.