Health Catalyst, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Health Catalyst provides cloud-based healthcare data and analytics technology, software applications, and professional services primarily to healthcare providers. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company employed more than 900 team members and operated through Technology and Professional Services segments.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $45.1 million | $35.2 million | +28% |
| Technology revenue | $24.7 million | $20.1 million | +23% |
| Professional services revenue | $20.4 million | $15.1 million | +36% |
| Net loss | $17.5 million | $13.7 million | Loss increased |
| Net loss per share | $0.47 | $16.21 | Prior period affected by preferred-stock accretion |
| Adjusted EBITDA | $(6.0) million | $(6.7) million | Improved by $0.7 million |
| Net cash used in operating activities | $16.8 million | $5.2 million | Use increased |
Cost of revenue excluding depreciation and amortization was $24.1 million, or 54% of revenue, versus 49% in the prior-year quarter. Gross profit excluding depreciation and amortization was $21.0 million, representing approximately 47% of revenue. Operating loss was $18.1 million, or approximately 40% of revenue, and net loss was approximately 39% of revenue.
Non-GAAP adjusted gross profit was $22.0 million, with adjusted gross margin of 49%, compared with 52% in Q1 2019. Adjusted Technology Gross Margin increased to 69% from 67%, while Adjusted Professional Services Gross Margin declined to 25% from 32%.
Cash, cash equivalents, and short-term investments totaled $204.6 million at March 31, 2020, including $61.0 million of cash and cash equivalents and $143.6 million of short-term investments. Cash increased by $42.9 million during the quarter, primarily from investment maturities and sales and stock-option exercise proceeds.
Debt consisted primarily of a $50.0 million OrbiMed term loan, net of debt discounts and issuance costs of $48.5 million on the balance sheet. The company reported $35.0 million of remaining credit capacity and compliance with its OrbiMed financial covenants at March 31, 2020.
Material changes versus the prior comparable period
- Revenue increased $9.9 million, driven by new customers, contractual annual technology-fee escalators, expanded support services, and increased professional-services activity.
- Professional services grew faster than technology, increasing its share of revenue to 45% from 43%, but its adjusted gross margin fell because of service mix and higher personnel costs.
- Operating expenses increased 35% to $39.2 million. Stock-based compensation rose to $8.7 million from $1.7 million, and general and administrative expense included $0.9 million of Able Health acquisition costs.
- Net loss increased despite higher revenue, primarily reflecting increased operating expenses and higher stock-based compensation. The prior-year net loss included $64.0 million of preferred-stock accretion, which did not recur after the IPO conversion.
- Operating cash use increased to $16.8 million, partly due to the larger net loss, increased accounts receivable, and working-capital changes.
- On February 21, 2020, the company acquired Able Health for approximately $21.5 million, consisting of $15.2 million in cash, $3.3 million in common stock, and approximately $3.0 million of contingent consideration. The acquisition added $0.4 million of revenue after closing and generated $14.7 million of goodwill.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical revenue or profitability forecast for 2020. Management stated that more than 90% of revenue was recurring but expected COVID-19 to negatively affect new subscription customer additions, dollar-based retention, professional-services retention, collections, and potentially revenue and Adjusted EBITDA. The company expected to use cost containment, primarily focused on non-headcount items, to partially offset pressure.
Management expected technology gross margin to fluctuate and potentially decline in the near term as customers transition to Microsoft Azure, which has higher per-customer hosting costs than the company’s private data center. The transition was expected to be substantially complete by the end of 2020. Professional-services margin could also decline because of service mix, higher headcount costs, and discounted services for financially strained healthcare customers.
Subsequent to quarter-end, on April 14, 2020, the company issued $230.0 million of 2.50% convertible senior notes due 2025 and received approximately $222.5 million of net proceeds. It used approximately $57.0 million to repay and terminate the OrbiMed term loan and approximately $21.6 million for capped-call transactions. The company estimated an approximately $8.5 million debt-extinguishment loss in Q2 2020. It also paid off the SVB revolving line of credit on April 8, 2020.
The company entered into an 11-year lease for a new headquarters requiring approximately $31.7 million of future lease payments, plus approximately $2.8 million of additional payments associated with planned expansion. Management also anticipated more than $10.0 million of capital expenditures for leasehold improvements, equipment, and furniture.
- Key risks include the uncertain duration and severity of COVID-19, healthcare-provider financial pressure, delayed procurement, lower renewals, and reduced collections.
- The company remains loss-making, expects continued losses, and has an accumulated deficit of $628.1 million at March 31, 2020.
- Competition, long sales cycles, customer concentration, changing healthcare regulations, data privacy and cybersecurity exposure, and reliance on third-party hosting providers could affect results.
- The Able Health contingent consideration liability was $2.7 million and depends on estimated billing targets and other unobservable assumptions.
- Management concluded that disclosure controls and procedures were effective at the reasonable assurance level, with no material change in internal control over financial reporting.
Important facts for investors to verify
- COVID-19 effects on customer additions, renewals, professional-services demand, accounts receivable collections, and full-year Adjusted EBITDA.
- The pace, cost, and margin impact of the Microsoft Azure hosting transition.
- Cash burn, liquidity after the convertible-note issuance, and the company’s ability to fund headquarters commitments and planned capital expenditures.
- Terms, potential dilution, conversion conditions, and cash-settlement requirements of the 2025 convertible notes and capped calls.
- Integration results and contingent consideration exposure related to the Able Health acquisition.
- Whether recurring revenue growth and customer retention offset continued operating losses and elevated stock-based compensation.