Health Catalyst, Inc. 2022 Q2 Form 10-Q Summary
Business context and reporting period
Health Catalyst provides cloud-based healthcare data-platform and analytics software, together with professional services, primarily to healthcare organizations. This filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $70.6 million | $59.6 million | $138.7 million | $115.5 million |
| Technology revenue | $45.4 million | $35.5 million | $87.6 million | $69.4 million |
| Professional services revenue | $25.2 million | $24.1 million | $51.1 million | $46.1 million |
| Net loss | $(33.4) million | $(35.8) million | $(55.9) million | $(64.2) million |
| Net loss per diluted share | $(0.62) | $(0.80) | $(1.15) | $(1.45) |
| Adjusted EBITDA | $2.0 million | $1.7 million | $2.7 million | $0.8 million |
| Total adjusted gross margin | 55% | 54% | 55% | 54% |
- Q2 revenue increased 18%; six-month revenue increased 20%. Technology revenue grew faster than professional services revenue, increasing the technology mix to 64% of Q2 revenue and 63% for the six-month period.
- Adjusted technology gross margin improved to 70% from 68% in Q2 and to 70% from 69% for the six-month period. Adjusted professional services gross margin declined to 27% from 34% in Q2 and to 28% from 33% for the six-month period, primarily because of service mix and lower utilization.
- GAAP loss from operations was $33.2 million in Q2 and $57.5 million for the six-month period. Depreciation and amortization increased 55% in Q2 and 52% year to date, primarily from acquired intangible assets.
- Cash flow from operations was negative $8.4 million for the six months, compared with negative $8.0 million in 2021. Investing cash flow was negative $12.1 million, including $27.8 million for acquisitions and $7.0 million of capitalized internal-use software.
- Cash, cash equivalents, and short-term investments totaled $403.3 million at June 30, 2022, consisting of $177.0 million of cash and cash equivalents and $226.4 million of short-term investments.
- The company had $230.0 million principal amount of 2.50% convertible senior notes due April 2025, recorded at a net carrying amount of $225.8 million. The notes were not convertible as of June 30, 2022 and contain no financial or operating covenants.
- Deferred revenue totaled $61.4 million. Remaining non-cancellable performance obligations totaled $106.0 million, of which approximately 70% was expected to be recognized over the following 24 months.
Material changes versus the prior comparable period
- Revenue growth was driven by new customers, acquired customers, contractual annual technology-price escalators, and expanded support offerings.
- Sales and marketing expense increased 25% in Q2 and 29% year to date, while research and development expense increased 25% and 22%, respectively, reflecting higher personnel, contractor, and stock-based compensation costs.
- General and administrative expense declined 22% in Q2 and 30% year to date, primarily because of lower changes in the fair value of acquisition-related contingent consideration.
- Interest and other expense declined 68% in Q2 and 63% year to date, primarily because adoption of ASU 2020-06 reduced non-cash amortization of the convertible-note discount.
- The company adopted ASU 2020-06 on January 1, 2022. The adoption increased the convertible-notes liability by $44.0 million, reduced additional paid-in capital by $61.2 million, and reduced accumulated deficit by $17.2 million.
- Health Catalyst acquired KPI Ninja for $21.4 million in February 2022 and ARMUS for $9.4 million in April 2022. The acquisitions added approximately $16.0 million of goodwill and increased acquired intangible assets; their contribution to Q2 revenue was not material.
Guidance, outlook, commentary, and risks
- Management did not provide a quantitative full-year revenue or profitability forecast in the filing. Management expected sequential declines in total revenue and Adjusted EBITDA in the third quarter of 2022 because of the loss of a large enterprise customer and customer reductions in professional-services and technology spending.
- Healthcare customers were experiencing labor and supply-cost inflation and margin pressure. Purchasing decisions were being delayed, sales cycles had lengthened, and year-to-date bookings, new-client additions, and dollar-based retention were below expectations. Management anticipated improved pipeline conversion in the second half of 2022.
- The company planned to pursue operating leverage by limiting investment in lower-return product areas and using offshore, nearshore, and strategic-partner resources in selected development, support, and professional-services functions.
- More than 90% of revenue was described as recurring, but many contracts can be terminated after one year with notice. Management also noted customer spending reductions, including the loss of a large enterprise DOS subscription customer.
- The transition of customers to Microsoft Azure was expected to increase hosting costs and pressure technology gross margins; the migration was expected to be substantially complete by the end of 2022.
- Principal risks include competition, long and unpredictable sales cycles, customer non-renewals or budget reductions, integration of acquisitions, employee retention, cybersecurity and healthcare-data privacy, reliance on third-party infrastructure including Microsoft Azure, regulatory changes, litigation, and the ability to fund losses and repay or settle the convertible notes.
- The filing reported no significant outstanding legal claims and no off-balance-sheet arrangements. Disclosure controls and procedures were concluded to be effective at the reasonable-assurance level.
- On August 2, 2022, after quarter-end, the board authorized a share-repurchase program of up to $40.0 million.
Important facts for investors to verify
- Whether the anticipated Q3 sequential revenue and Adjusted EBITDA declines occurred and how quickly bookings, sales cycles, retention, and pipeline conversion improved.
- The effect of customer budget pressure and the loss of the large enterprise customer on recurring revenue and future renewals.
- Progress, costs, service performance, and margin impact of the Microsoft Azure migration.
- Whether professional-services utilization and gross margins recover from the Q2 decline.
- Integration results and incremental costs from the KPI Ninja and ARMUS acquisitions, including retention payments and potential contingent consideration.
- Cash-burn trends, the timing and funding plan for the $230.0 million convertible notes due in 2025, and the impact of the authorized share repurchase.
- The magnitude of stock-based compensation, which totaled $36.1 million for the first six months, and its effect on non-GAAP profitability and shareholder dilution.