Health Catalyst, Inc. — Form 10-Q Summary
Business context and reporting period
Health Catalyst provides cloud-based healthcare data platforms, analytics software, and professional services primarily to healthcare providers. This report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The company completed its initial public offering (IPO) on July 29, 2019 and remains an emerging growth company.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $39.4 million | $32.9 million | $111.4 million | $76.5 million |
| Technology revenue | $21.2 million | $18.3 million | $61.4 million | $38.5 million |
| Professional services revenue | $18.3 million | $14.6 million | $50.0 million | $38.0 million |
| Net loss | $(21.4) million | $(16.9) million | $(45.8) million | $(48.4) million |
| Net loss attributable to common stockholders | $(39.6) million | $(17.4) million | $(226.7) million | $(36.4) million |
| Adjusted EBITDA | $(8.4) million | $(11.3) million | $(20.9) million | $(28.6) million |
| Adjusted gross margin | 54% | 50% | 53% | 48% |
| Net cash used in operating activities | Not separately presented | $(19.1) million | $(27.3) million |
Q3 revenue increased 20%, while nine-month revenue increased 46%. Q3 GAAP gross margin before depreciation and amortization was approximately 53%, compared with approximately 48% in the prior-year quarter. Operating losses were $20.7 million in Q3 and $41.2 million for the nine-month period.
Financial position, liquidity, and debt
- At September 30, 2019, cash and cash equivalents were $52.1 million and short-term investments were $189.4 million, for total cash, cash equivalents, and short-term investments of approximately $241.4 million.
- Total assets were $320.0 million, compared with $111.0 million at December 31, 2018. Stockholders’ equity was $206.6 million, compared with a deficit of $374.8 million, primarily reflecting the IPO and conversion of preferred stock.
- Long-term debt was $47.9 million, net of discounts and issuance costs. The OrbiMed term loan had a $50.0 million balance, a 10.0% contractual rate floor, and a February 2024 maturity. The facility had up to $30.0 million of additional contingent capacity.
- The company had a $5.0 million SVB revolving line of credit with no balance outstanding and $30.0 million of total remaining credit capacity across the disclosed facilities.
- Management stated that existing cash, investments, and available borrowing capacity should fund working capital and capital expenditures for at least the next 12 months, although additional capital may be required in the future.
Material changes versus the prior comparable period
- Technology revenue grew 16% in Q3 and 60% for the nine-month period; professional services revenue grew 25% and 32%, respectively.
- Revenue growth reflected new customers, contractual annual escalators, expanded support services, and the inclusion of Medicity revenue for a full comparable period in 2019. Medicity contributed approximately $13.0 million of revenue during the first six months of 2019, with no corresponding 2018 revenue.
- Technology revenue represented 55% of nine-month revenue, up from 50% in 2018, partly due to the Medicity acquisition.
- Adjusted professional services gross margin improved to 37% in Q3 and 35% for nine months, versus 29% and 28%, respectively, driven by utilization efficiencies and service mix.
- Stock-based compensation increased to $10.0 million in Q3 and $13.0 million for nine months, including approximately $6.0 million of cumulative catch-up expense triggered by the IPO.
- The IPO generated $194.6 million of proceeds after underwriting discounts and before offering costs. All outstanding redeemable convertible preferred stock converted into common stock.
- The nine-month net loss attributable to common stockholders includes $180.8 million of preferred-stock accretion associated primarily with the IPO conversion, making the reported per-share loss of $17.78 not directly comparable with operating performance.
- Cash flow from operations improved by $8.2 million year over year, while investing cash flow declined because the company invested $221.4 million in short-term investments following the IPO.
Guidance, outlook, commentary, and risks
- The filing does not provide explicit numerical revenue or earnings guidance.
- Management expects continued investment in sales and marketing, research and development, personnel, and public-company compliance. Expenses are expected to rise in absolute dollars, although management expects them to decline as a percentage of revenue over the long term.
- The company expects adjusted gross margin to generally improve over the long term but fluctuate between periods. Technology margin may decline in the near term as customers migrate from company-managed and on-premise environments to Microsoft Azure, which has higher hosting costs. The migration was expected to be substantially complete by the end of 2020.
- Professional services margins may fluctuate or decline due to service mix and anticipated compensation costs from increased headcount.
- Key risks include continued operating losses and negative operating cash flow, dependence on customer renewals and expansion, long healthcare procurement cycles, competition from larger technology and healthcare vendors, Medicity integration and cross-selling execution, cybersecurity and protected health information obligations, third-party hosting disruptions, regulatory changes, intellectual property claims, and debt covenants and variable interest rates.
- Deferred revenue totaled $39.6 million at September 30, 2019. The company expected to recognize approximately $64.0 million of remaining performance obligations for contracts that could not be canceled within one year, with approximately 80% expected to be recognized over the following 24 months.
- No significant outstanding legal claims were disclosed as of September 30, 2019. Management concluded that disclosure controls and procedures were effective at the reasonable assurance level.
Most important facts for investors to verify
- Whether revenue growth remains organic after separating Medicity-related revenue and whether customer renewals, expansion, and cross-selling support future growth.
- The pace and cost of the Microsoft Azure migration and its effect on technology gross margins.
- The company’s path toward positive adjusted EBITDA, operating cash flow, and GAAP profitability.
- Debt covenant compliance, interest expense, repayment premiums, and the ability to service the OrbiMed term loan.
- The sustainability of liquidity after considering ongoing operating cash use, public-company costs, capital expenditures, and potential future financing needs.
- The effect of substantial stock-based compensation, outstanding options, RSUs, and future equity-plan issuances on dilution and reported earnings.
- Exposure to healthcare privacy, cybersecurity, data-access, regulatory, litigation, and third-party hosting risks.