Health Catalyst, Inc. 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 quarterly report covers the three and nine months ended September 30, 2023; financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $73.8 million | $68.4 million | $220.9 million | $207.1 million |
| Technology revenue | $46.0 million | $44.0 million | $140.5 million | $131.6 million |
| Professional services revenue | $27.8 million | $24.4 million | $80.4 million | $75.5 million |
| Loss from operations | $(24.6) million | $(45.7) million | $(94.1) million | $(103.3) million |
| Net loss | $(22.0) million | $(45.7) million | $(87.8) million | $(101.6) million |
| Net loss per diluted share | $(0.39) | $(0.84) | $(1.57) | $(1.97) |
| Adjusted EBITDA | $2.0 million | $(4.6) million | $9.7 million | $(1.9) million |
- Revenue increased 8% year over year in Q3 and 7% for the first nine months. Technology represented 62% of Q3 revenue and 64% of nine-month revenue.
- Adjusted technology gross margin was 68% in Q3 and 69% for the nine months, compared with 68% and 70%, respectively, in the prior-year periods.
- Adjusted professional services gross margin declined to 12% in Q3 and 16% for the nine months, from 20% and 26%, respectively, primarily due to growth in lower-margin Tech-enabled Managed Services and lower utilization.
- Total adjusted gross margin declined to 47% in Q3 and 50% for the nine months, from 51% and 54%, respectively.
- Operating expenses were $56.6 million in Q3 and $195.4 million for the nine months, down 27% and 5%, respectively. Sales and marketing and research and development expenses declined, while nine-month general and administrative expense increased because of litigation costs.
- Interest and other income, net was $2.6 million in Q3 and $6.5 million for the nine months, benefiting from higher interest income on investments.
- Cash flow from operations was $(14.0) million for the nine months, an improvement from $(20.4) million in the prior-year period. Capitalized internal-use software costs were $9.3 million.
- Cash, cash equivalents, and short-term investments totaled $347.7 million at September 30, 2023, including $95.0 million of cash and cash equivalents and $252.7 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 $227.7 million carrying value. The notes were not convertible as of September 30, 2023. Management stated that existing liquidity should cover working capital and capital expenditure needs for at least the next 12 months.
- Deferred revenue totaled $53.4 million, and remaining noncancelable performance obligations were $196.0 million, with approximately 70% expected to be recognized over the following 24 months.
Material changes versus the prior comparable period
- Revenue growth was driven by new clients, expansion with existing clients, contractual technology price escalators, expanded support services, and Tech-enabled Managed Services.
- Sales and marketing expense fell substantially, partly because the Healthcare Analytics Summit occurred in September 2022 and is expected to occur in February 2024, as well as from lower headcount and stock-based compensation.
- Professional services costs increased faster than revenue because of additional personnel and contractor costs supporting Tech-enabled Managed Services.
- Nine-month general and administrative expense included $21.3 million of litigation costs, compared with none in the prior-year period.
- The company repurchased 145,027 shares for $1.8 million during the first nine months. The remaining share repurchase authorization was $29.8 million at September 30, 2023.
- The prior-year period included greater restructuring costs, acquisition-related activity, lease impairments, and a $4.3 million income tax benefit that did not recur in 2023.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide clear formal full-year revenue or earnings guidance. Management expects annual Adjusted EBITDA to improve generally, although quarterly results may fluctuate.
- Management expects professional services growth to slightly outpace technology growth in 2023, with a greater contribution from Tech-enabled Managed Services. This mix is expected to pressure near-term gross margins but may improve longer-term EBITDA through operating leverage and service efficiencies.
- Management expects technology gross margin to fluctuate or potentially decline in the near term because of migrations to Microsoft Azure and the multi-tenant Snowflake and Databricks-enabled platform.
- Healthcare clients continue to face labor, supply-cost, inflation, and interest-rate pressures. Management reported lower pipeline demand and elevated churn, especially for offerings without near-term financial return on investment, although recent conditions showed slight improvement.
- On June 27, 2023, the company paid $18.8 million to settle Pascal Metrics litigation without admitting wrongdoing and received a broad intellectual-property license. The matter was dismissed with prejudice.
- On October 2, 2023, after the reporting period, the company acquired Electronic Registry Systems for approximately $11.5 million in cash and 175,901 shares subject to revesting.
- On October 31, 2023, after the reporting period, the board authorized a restructuring expected to reduce the global workforce by approximately 10% in the fourth quarter of 2023. The company expects at least $6.0 million of related charges, primarily severance, with activities continuing to a lesser extent in the first quarter of 2024.
- Key risks include healthcare-client budget pressure and churn, long and unpredictable sales cycles, competition, reliance on third-party data and Microsoft Azure, cybersecurity and privacy compliance, professional-services execution, acquisition integration, litigation, continued losses, and the need to fund or refinance the 2025 convertible notes.
- Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and bookings remain durable as healthcare customers face budget constraints and elevated churn.
- The effect of the 2023 restructuring on headcount, service capacity, operating expenses, severance charges, and future Adjusted EBITDA.
- Whether professional services mix and Azure/platform migration costs cause further gross-margin deterioration.
- The company’s ability to generate positive operating cash flow and maintain sufficient liquidity to address the $230.0 million convertible notes due in 2025.
- The preliminary purchase accounting, integration costs, and operating contribution from the ERS acquisition.
- The sustainability and comparability of Adjusted EBITDA, given substantial exclusions for stock-based compensation, litigation, acquisition-related costs, restructuring, and lease impairments.
- Potential impacts from cybersecurity incidents, data-privacy regulation, third-party infrastructure outages, intellectual-property claims, and healthcare regulatory changes.