Health Catalyst, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Health Catalyst provides cloud-based healthcare data platforms, analytics applications, and professional services primarily to healthcare providers. This report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The interim financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $73.9 million | $68.1 million | Up 8% |
| Technology revenue | $47.2 million | $42.2 million | Up 12% |
| Professional services revenue | $26.7 million | $25.9 million | Up 3% |
| Loss from operations | $(34.9) million | $(24.3) million | Loss increased |
| Net loss | $(33.2) million | $(22.5) million | Loss increased |
| Basic and diluted loss per share | $(0.60) | $(0.42) basic | Unfavorable |
| Adjusted EBITDA | $4.2 million | $0.7 million | Improved |
| Net cash used in operating activities | $(5.6) million | $1.2 million provided | Unfavorable |
Technology represented 64% of revenue and professional services 36%. GAAP cost of revenue, excluding depreciation and amortization, was $38.3 million, or 52% of revenue, compared with 50% in the prior-year quarter. Adjusted technology gross margin was 70%, unchanged year over year; adjusted professional services gross margin declined to 20% from 29%; and total adjusted gross margin declined to 52% from 55%.
Q1 2023 operating expenses were $70.5 million, including $11.0 million of depreciation and amortization, $13.9 million of stock-based compensation, $11.7 million of litigation costs, and $2.1 million of restructuring costs. Interest and other income, net, was $1.8 million, primarily reflecting higher interest income on investments.
As of March 31, 2023, cash and cash equivalents were $133.5 million and short-term investments were $223.4 million, for total cash, cash equivalents, and short-term investments of approximately $356.9 million. Current assets were $434.5 million versus current liabilities of $102.5 million. Accounts receivable increased to $61.9 million from $48.0 million at December 31, 2022, and the allowance for credit losses increased to $3.8 million from $2.3 million.
Convertible senior notes had a principal balance of $230.0 million and a carrying value of $226.9 million. The 2.50% notes mature April 15, 2025; they were not convertible as of March 31, 2023. The estimated fair value was $209.2 million. The company states that existing cash, investments, and available credit facilities should fund working capital and capital expenditure needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased $5.8 million, led by technology revenue from new and acquired clients, contractual annual escalators, and expanded support services.
- Professional services revenue grew modestly, while its adjusted gross margin declined because of growth in lower-margin Tech-enabled Managed Services and lower utilization.
- Sales and marketing expense declined 11% to $18.6 million, primarily from lower headcount, stock-based compensation, and advertising costs.
- General and administrative expense increased 170% to $23.8 million, primarily due to $11.7 million of litigation costs and the absence of a prior-year $8.4 million gain from the change in fair value of contingent consideration.
- Stock-based compensation declined to $13.9 million from $18.1 million.
- Operating cash flow declined from $1.2 million provided to $5.6 million used, primarily due to the larger net loss and a $15.4 million increase in accounts receivable.
- The company repurchased 145,027 shares for $1.8 million at an average price of $12.45 per share. Approximately $29.8 million remained available under the $40.0 million authorization.
- The company recorded $2.1 million of restructuring costs in Q1 2023; cumulative restructuring charges reached $10.5 million, with the plan substantially completed.
Outlook, Commentary, Risks, and Unusual Items
Management reported continued financial strain among healthcare-system clients from inflation, labor and supply costs, and higher interest rates. The company has experienced reduced pipeline demand and elevated churn, particularly for clinically focused technology offerings and traditional consulting services that do not provide near-term financial returns.
Management expects a greater proportion of bookings to come from existing clients, elevated technology churn to be concentrated in the first half of 2023, and a higher proportion of net bookings in the second half. Professional services revenue growth is expected to slightly outpace technology growth for full-year 2023, driven by Tech-enabled Managed Services. Management expects this mix to pressure professional services and total adjusted gross margins in the near term, while potentially improving longer-term Adjusted EBITDA through operating leverage.
The company expects adjusted operating expenses as a percentage of revenue to decline through restructuring and operating leverage, and generally expects annual Adjusted EBITDA to improve, although quarterly results may fluctuate. The filing does not provide a clear numerical revenue or earnings guidance range.
Important unusual items include an accrued $10.0 million litigation contingency related to Pascal Metrics. Trial was scheduled for June 5, 2023. Management believes the claims are without merit, but states that a reasonable potential loss range may be $10 million to $25 million and that the ultimate outcome cannot be predicted.
Key risks include healthcare-client budget pressure and churn, long sales cycles, competition, cybersecurity and data-privacy compliance, reliance on Microsoft Azure and other third parties, technology migration costs, professional-services execution, acquisition integration, continued losses, the 2025 notes, and potential additional litigation. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Facts Investors Should Verify
- Whether healthcare-client churn and pipeline weakness persisted beyond the first half of 2023.
- Progress and cost impact of Azure and Snowflake/Databricks platform migrations, including effects on technology gross margin.
- Conversion of Tech-enabled Managed Services bookings into revenue, margin improvement, and Adjusted EBITDA.
- Cash burn, accounts receivable collections, and the company’s ability to fund operations and repay or refinance the $230.0 million notes due in 2025.
- Developments and ultimate resolution of the Pascal Metrics litigation, including any loss above the $10.0 million accrued amount.
- Use of the remaining $29.8 million share-repurchase authorization while the company continues to report GAAP net losses.
- Stock-based compensation, dilution from equity awards and convertible notes, and the company’s path toward sustained GAAP profitability.