Health Catalyst, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Health Catalyst provides healthcare data and analytics technology, software applications, and professional services primarily to healthcare providers. Its offerings include the cloud-based Data Operating System (DOS), analytics applications, and implementation, advisory, and tech-enabled managed services. The filing covers the fiscal year ended December 31, 2022, with comparisons primarily to fiscal 2021.
- As of December 31, 2022, the company served 98 DOS Subscription Clients and more than 425 other clients.
- More than 90% of revenue was recurring. Technology represented 64% of revenue and professional services represented 36%.
- The company completed acquisitions of KPI Ninja and ARMUS during 2022.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $276.2 million | $241.9 million | 14% increase |
| Technology revenue | $176.3 million | $147.7 million | 19% increase |
| Professional services revenue | $99.9 million | $94.2 million | 6% increase |
| Net loss | $137.4 million | $153.2 million | Loss narrowed |
| Loss from operations | $140.0 million | $143.7 million | Loss narrowed |
| Adjusted EBITDA | $(2.5) million | $(11.2) million | Improved by $8.8 million |
| Total adjusted gross margin | 53% | 53% | Flat |
| Adjusted technology gross margin | 69% | 69% | Flat |
| Adjusted professional services gross margin | 24% | 27% | Down 3 percentage points |
- GAAP gross profit before depreciation and amortization was $133.2 million, or 48% of revenue. Non-GAAP adjusted gross profit was $145.8 million.
- Operating expenses were $273.2 million, including $48.3 million of depreciation and amortization and $72.1 million of stock-based compensation.
- Basic net loss per share was $2.56; diluted net loss per share was $2.63.
- Net cash used in operating activities was $35.3 million, compared with $23.1 million in 2021.
- Net cash used in investing activities was $39.0 million, including $27.8 million for acquisitions and $13.0 million of capitalized internal-use software.
- Cash, cash equivalents, and short-term investments totaled $363.5 million at year-end, down from $445.0 million at December 31, 2021.
- The company had $230.0 million principal amount of 2.50% convertible senior notes due April 15, 2025. The notes were recorded as $226.5 million of long-term debt, net of discounts and issuance costs.
- Operating lease obligations totaled $21.5 million, including $3.4 million due within 12 months.
- Management stated that existing cash, cash equivalents, and marketable securities should fund working capital and capital expenditure needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue increased 14%, driven by new and acquired clients, contractual technology fee escalators, expanded support services, and implementation and analytics work.
- Technology revenue grew faster than professional services revenue, increasing its mix from 61% to 64% of total revenue.
- Technology gross margin remained stable despite higher Microsoft Azure hosting costs and platform migration expenses.
- Professional services adjusted gross margin declined from 27% to 24% because of service mix changes and lower utilization.
- General and administrative expense fell 28%, primarily because 2021 included a substantial increase in the fair value of contingent consideration liabilities.
- Sales and marketing expense increased 17% and research and development expense increased 21%, reflecting higher personnel, stock-based compensation, restructuring, and contractor costs.
- The company recorded $8.4 million of restructuring costs in 2022, including workforce reductions and impairment of discontinued software projects. It expected at least $1.5 million of additional restructuring costs in the first half of 2023.
- Dollar-based Retention Rate declined to 100% from 112%, primarily due to the loss of a large enterprise DOS client, lower demand for offerings without near-term return on investment, and customer spending reductions.
- The company repurchased 709,139 shares for $8.4 million under a $40.0 million authorization, leaving $31.6 million available at year-end.
- Cash declined by $76.9 million during 2022, compared with a $101.3 million increase in 2021, when the company received $245.2 million from a public equity offering.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific numerical revenue or earnings outlook in the filing. It expects challenging healthcare-provider budgets, inflation, high interest rates, labor pressures, and lingering COVID-19 effects to persist in the near term. These conditions lengthened sales cycles, delayed purchasing decisions, reduced some customer spending, and pressured bookings and retention.
- Management expects a greater proportion of 2023 growth to come from Tech-enabled Managed Services and other offerings that provide near-term financial or operational savings.
- Management expects Adjusted EBITDA to continue improving, but anticipates near-term pressure on professional services and total adjusted gross margins as Tech-enabled Managed Services grows.
- Technology margins may face additional pressure from migrations to Microsoft Azure and to a multi-tenant platform using Snowflake and Databricks.
- The company remains loss-making, with an accumulated deficit of $999.0 million at year-end, and expects to incur losses in the future.
- Material risks include intense competition, long and unpredictable sales cycles, customer non-renewals or budget reductions, reliance on third-party data and cloud infrastructure, cybersecurity and privacy incidents, evolving healthcare regulation, and the need to maintain accurate analytics used in clinical and operational decisions.
- Pascal Metrics alleges trade-secret misappropriation relating to Patient Safety Monitor. The case remained in discovery, with a trial scheduled for June 5, 2023. The company disputes the allegations and stated that it could not estimate a possible loss.
- The company adopted ASU 2020-06 in 2022, increasing the recorded convertible-note liability and reducing non-cash interest expense. The adoption had a significant balance-sheet presentation effect but did not change the company’s ongoing cash obligations.
- The company reported unqualified audit opinions on its financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth and improving Adjusted EBITDA continue without relying disproportionately on acquisitions or non-GAAP adjustments.
- Whether Dollar-based Retention Rate improves from 100% and whether the company can replace the lost enterprise DOS client.
- The pace and economics of Tech-enabled Managed Services growth, including its effect on professional services and total gross margins.
- The cost, timing, and customer-retention impact of Azure and multi-tenant platform migrations.
- Cash burn and liquidity relative to the $230.0 million convertible notes due in 2025.
- The amount and timing of additional restructuring costs and whether projected cost savings are realized.
- The outcome and potential financial exposure from the Pascal Metrics litigation.
- The effect of stock-based compensation, which totaled $72.1 million in 2022, on dilution and underlying profitability.