Health Catalyst, Inc. annual report, FY2019

Health Catalyst, Inc. Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019, filed February 27, 2020. The filing includes fourth-quarter results for the three months ended December 31, 2019. Health Catalyst provides healthcare data-platform, analytics software, interoperability, and professional services. The company completed its initial public offering in July 2019 and trades on Nasdaq under HCAT.

Financial Performance and Position

Metric	2019	2018	Change
Total revenue	$154.9 million	$112.6 million	+38%
Technology revenue	$84.0 million	$57.2 million	+47%
Professional services revenue	$71.0 million	$55.4 million	+28%
Net loss	$(60.1) million	$(62.0) million	Improved by $1.9 million
Loss from operations	$(54.9) million	$(60.1) million	Improved by $5.2 million
Adjusted EBITDA	$(27.4) million	$(38.1) million	Improved by $10.7 million
Operating cash flow	$(32.2) million	$(40.3) million	Improved by $8.1 million

Fourth quarter: Revenue was $43.5 million, compared with $36.1 million in the fourth quarter of 2018. Net loss was $(14.3) million, compared with $(13.6) million in the prior-year quarter.
Margins: Adjusted gross profit was $80.9 million and adjusted gross margin was 52%, compared with 48% in 2018. Adjusted technology gross margin increased to 67% from 66%; adjusted professional services gross margin increased to 35% from 29%.
Expenses: Sales and marketing expense increased 7% to $47.3 million; research and development increased 20% to $46.3 million; general and administrative expense increased 40% to $31.7 million. Stock-based compensation increased to $17.8 million from $4.2 million, including a $6.0 million IPO-related catch-up charge for two-tier awards.
Liquidity: Cash, cash equivalents, and short-term investments totaled $228.3 million at year-end, including $210.2 million of short-term investments and $18.0 million of cash and cash equivalents. Working capital was $246.7 million.
Debt: Long-term debt was $48.2 million, principally the OrbiMed term loan with $50.0 million of principal outstanding, a 10% interest rate, and a February 2024 maturity. The company also had a $5.0 million undrawn SVB revolving facility.
Cash sources and uses: The IPO generated approximately $194.6 million of proceeds after underwriting discounts and commissions, before offering costs. Investing cash outflow was $209.6 million, primarily reflecting purchases of short-term investments.
Operating metrics: DOS subscription customers increased to 65 from 50. Dollar-based retention increased to 109% from 107%. More than 90% of 2019 revenue was recurring in nature.

Material Changes Versus the Prior Comparable Period

Revenue growth reflected new DOS customers, expansion with existing customers, contractual annual escalators, and a full year of Medicity-related revenue. Medicity contributed $12.2 million of technology revenue during the first half of 2019 without a corresponding prior-year period.
Revenue mix shifted toward technology, which represented 54% of total revenue versus 51% in 2018; professional services represented 46% versus 49%.
Cost of revenue increased 26%, slower than revenue growth, supporting improved adjusted gross margin. Technology hosting costs increased, particularly from expanded use of Microsoft Azure.
The company replaced its SVB term loan with the OrbiMed facility, resulting in a $1.7 million loss on debt extinguishment.
All redeemable convertible preferred stock converted into common stock upon the IPO. Stockholders’ equity became positive at $200.6 million, compared with a deficit of $374.8 million at year-end 2018.
Common stock outstanding increased substantially following the IPO and preferred-stock conversion. The company had 7.8 million stock options and 0.5 million unvested restricted stock units outstanding at year-end.

Outlook, Commentary, Risks, and Unusual Items

Management expects continued investment in sales and marketing, research and development, infrastructure, and public-company compliance. The filing does not provide quantitative 2020 revenue or earnings guidance.
The planned migration of customers from private data centers and on-premise deployments to Microsoft Azure was expected to be substantially complete by the end of 2020. Management expects the transition to increase hosting costs and pressure technology gross margin in the near term.
Management expects professional services margins to fluctuate and potentially decline because of service mix changes and increased headcount costs.
The company expects to remain unprofitable and states that it may require additional capital in the future, although existing liquidity and available credit were expected to fund working capital and capital expenditures for at least the next 12 months.
Key risks include intense competition, long and variable healthcare-provider sales cycles, customer non-renewals, reliance on third-party hosting providers, cybersecurity and protected-health-information exposure, evolving healthcare and privacy regulation, regulatory certification requirements, and dependence on specialized personnel.
Credit agreements are secured by substantially all company assets and contain financial and operating covenants. A default could permit acceleration of debt and foreclosure on collateral.
The company reported no legal proceedings that management believed would individually or collectively have a material adverse effect, and no significant outstanding claims as of December 31, 2019.
Subsequent event: On February 21, 2020, Health Catalyst acquired Able Health for preliminary consideration of approximately $19 million, including approximately $15 million in cash and 110,662 common shares. Additional contingent consideration and $5.4 million of expected stock-based compensation may apply.

Important Facts for Investors to Verify

Reconcile reported revenue growth and retention metrics after separating organic DOS growth from Medicity contributions.
Assess the effect of the Azure migration on technology hosting costs, service reliability, and technology gross margin.
Review cash burn, the timing of future debt amortization beginning in 2023, interest costs, covenant requirements, and the need for additional financing.
Adjust profitability analysis for the substantial increase in stock-based compensation and other non-GAAP exclusions.
Evaluate customer concentration, renewal and expansion trends, and the risk of lower revenue from Medicity customers.
Review the Able Health purchase accounting, contingent consideration, dilution, and integration results in subsequent filings.
Consider privacy, cybersecurity, HIPAA, GDPR, CCPA, FDA, interoperability, and other healthcare-regulatory compliance exposure.