Health Catalyst, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. Health Catalyst provides cloud-based healthcare data and analytics technology, software, and professional services. The company had more than 900 team members and reported under the emerging growth company framework.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $43.3 million | $36.8 million | $88.4 million | $72.0 million |
| Technology revenue | $25.5 million | $20.1 million | $50.2 million | $40.2 million |
| Professional services revenue | $17.8 million | $16.7 million | $38.2 million | $31.8 million |
| Net loss | $(27.2) million | $(10.7) million | $(44.7) million | $(24.4) million |
| Net loss per share | $(0.71) | $(21.98) | $(1.19) | $(38.29) |
| Adjusted EBITDA | $(4.2) million | $(5.7) million | $(10.2) million | $(12.4) million |
| Net cash used in operating activities | — | — | $(17.5) million | $(13.6) million |
Q2 revenue increased 18%; technology revenue increased 27% and professional services revenue increased 6%. Six-month revenue increased 23%, with technology revenue up 25% and professional services revenue up 20%.
GAAP loss from operations was $(15.6) million in Q2 and $(33.7) million for the six months. The Q2 loss included an $8.5 million loss on extinguishment of debt and $3.0 million of net interest and other expense. Stock-based compensation was $9.0 million in Q2 and $17.8 million for the six months, compared with $1.4 million and $3.1 million, respectively, in the prior-year periods.
Non-GAAP total adjusted gross margin was 49% in Q2 and for the six months, compared with 52% in both prior-year periods. Adjusted technology gross margin improved to 69% from 65% in Q2 and to 69% from 66% for the six months. Adjusted professional services gross margin declined to 21% from 37% in Q2 and to 23% from 34% for the six months.
Cash, liquidity, debt, and capital resources
- Cash and cash equivalents were $104.2 million and short-term investments were $248.9 million at June 30, 2020, for total cash, cash equivalents, and short-term investments of approximately $353.1 million.
- Operating cash burn was $17.5 million for the first six months. Investing cash outflow was $56.7 million, primarily reflecting purchases of short-term investments and the Able Health acquisition.
- Financing activities generated $160.4 million, principally from the $222.5 million net proceeds from convertible notes, partially offset by the $57.0 million repayment of the OrbiMed facility and $21.7 million for capped calls.
- On April 14, 2020, the company issued $230.0 million of 2.50% convertible senior notes due 2025. The notes had a net carrying amount of $163.5 million at June 30, 2020 and an initial conversion price of approximately $30.60 per share.
- The OrbiMed term loan and SVB revolving line of credit were fully terminated in April 2020. The notes are senior unsecured obligations and do not contain financial or operating covenants.
- Management stated that existing cash, cash equivalents, marketable securities, and available credit were expected to fund working capital and capital expenditure needs for at least the next 12 months, while noting that additional capital may be required in the future.
Material changes versus the prior comparable period
- Revenue growth was led by new customers, contractual annual technology fee escalators, expanded support offerings, and greater deployment of services.
- Professional services profitability weakened materially because the company temporarily discounted services to support healthcare-provider customers affected by COVID-19. Management expected some additional margin pressure in Q3 2020 but did not expect the discounts to remain significant beyond that period.
- Technology costs increased, including higher Microsoft Azure hosting costs as customers migrated from company-managed data centers and on-premise environments.
- Operating expenses increased across sales and marketing, research and development, and general and administrative functions. Higher stock-based compensation was a significant contributor.
- The February 2020 acquisition of Able Health added $14.7 million of goodwill and increased intangible assets. Total consideration was $21.5 million, including $15.2 million of cash, $3.3 million of stock, and contingent consideration.
- Goodwill increased to $18.4 million from $3.7 million at December 31, 2019, primarily because of Able Health.
Outlook, commentary, risks, and unusual items
- More than 90% of revenue was recurring. Management reported no DOS subscription customer churn attributed to COVID-19 and stated that platform usage had increased, supporting expectations for a relatively muted 2020 revenue impact.
- COVID-19 delayed elective procedures, strained customer finances, lengthened procurement activity, and reduced first-half net new DOS subscription additions relative to management’s original expectations. The company expected these factors to pressure revenue and Adjusted EBITDA.
- Management planned cost containment, with a preference for non-headcount measures, to partially offset COVID-19-related revenue pressure.
- The company expected technology gross margin to fluctuate or decline in the near term because Azure hosting is more expensive than its private data center. The Azure migration was expected to be substantially complete by the end of 2020.
- The company entered an 11-year South Jordan, Utah headquarters lease requiring approximately $31.7 million of lease payments, plus approximately $2.8 million of additional payments from planned expansion. It also anticipated more than $10 million of capital expenditures for improvements, equipment, and furniture.
- Subsequent to quarter-end, Health Catalyst acquired Healthfinch for preliminary consideration of approximately $45 million, including cash and stock. It also entered an agreement to acquire Vitalware for approximately $120 million, plus a potential earnout of up to $30 million; the transaction was expected to close in the third or fourth quarter of 2020.
- Key risks include the duration and severity of COVID-19, customer concentration and healthcare-provider financial stress, competition, long sales cycles, customer renewals, data privacy and security, third-party hosting dependencies, regulatory changes, acquisition integration, continued losses, and the ability to fund or refinance the 2025 convertible notes.
- There was no formal quantitative revenue or profitability guidance provided in the filing text.
Important facts for investors to verify
- Whether recurring revenue, customer retention, and technology dollar-based retention remain resilient as COVID-19 effects continue.
- The duration and magnitude of professional services discounts and their effect on professional services and consolidated gross margins.
- Progress, costs, and margin effects of migration to Microsoft Azure.
- Cash burn, acquisition spending, headquarters capital expenditures, and the resulting liquidity runway.
- Terms, potential dilution, and cash settlement obligations associated with the $230.0 million convertible notes and $42.00 capped calls.
- Integration performance and final purchase accounting for Able Health, Healthfinch, and the proposed Vitalware acquisition.
- Ability to reduce substantial stock-based compensation and operating losses while continuing investment in growth.