Business Context and Reporting Period
Health Catalyst, Inc. provides cloud-based healthcare data-platform and analytics software, together with professional services, primarily to healthcare providers. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the same periods in 2018. The company operated in two reportable segments: Technology and Professional Services, and had more than 700 team members.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $36.8 million, up 60% | $72.0 million, up 65% |
| Technology revenue | $20.1 million, up 87% | $40.2 million, up 99% |
| Professional services revenue | $16.7 million, up 36% | $31.8 million, up 36% |
| Net loss | $10.7 million, versus $19.3 million | $24.4 million, versus $31.5 million |
| Loss from operations | $9.4 million, versus $18.8 million | $20.5 million, versus $30.7 million |
| Adjusted EBITDA | $(5.7) million, versus $(8.0) million | $(12.4) million, versus $(17.3) million |
| Total adjusted gross margin | 52%, versus 47% | 52%, versus 46% |
Technology represented 55% of second-quarter revenue and 56% of first-half revenue, compared with 47% and 46%, respectively, in the prior-year periods. Professional services represented the balance. GAAP gross profit before depreciation and amortization was $19.1 million for the quarter and $37.0 million for the first half; the filing emphasizes adjusted gross profit of $19.3 million and $37.3 million, respectively.
As of June 30, 2019, cash and cash equivalents were $20.8 million and short-term investments were $33.3 million, for total cash, cash equivalents, and short-term investments of $54.1 million. Accounts receivable were $34.5 million, and total deferred revenue was $41.7 million. Total assets were $139.7 million.
Debt consisted primarily of a $50.0 million OrbiMed term loan, reported net of debt discount and issuance costs as $47.6 million of long-term debt. The loan bears interest at the higher of LIBOR plus 7.5% or 10.0%, matures in February 2024, and permits up to an additional $30.0 million of contingent borrowing subject to technology-revenue requirements. The company also had no balance drawn on its $5.0 million SVB revolving line of credit, subject to a cash-maintenance requirement.
Net cash used in operating activities was $13.6 million for the six months ended June 30, 2019, compared with $21.4 million in 2018. Investing activities used $30.2 million, principally because of purchases of short-term investments, while financing activities provided $36.2 million, including net OrbiMed borrowing and Series F preferred-stock proceeds. Cash and cash equivalents decreased by $7.6 million during the period.
Material Changes Versus the Prior Comparable Period
- Revenue growth included $6.4 million of second-quarter and $13.0 million of first-half revenue from the Medicity business acquired in June 2018. Management reported organic revenue growth of 32% for the quarter and 35% for the first half.
- Technology revenue growth reflected new customers, contractual annual price escalators, expanded support offerings, and Medicity revenue. The revenue mix shifted toward technology following the acquisition.
- Adjusted Technology Gross Margin declined to 65% for the quarter and 66% for the first half, from 70% and 67%, primarily because of higher costs associated with migrating customers to Microsoft Azure.
- Adjusted Professional Services Gross Margin improved to 37% for the quarter and 34% for the first half, from 28% in both prior-year periods, driven by higher revenue and utilization.
- Operating losses narrowed despite increased research and development, depreciation and amortization, and interest expense. The prior-year periods included $8.3 million of tender-offer payments treated as compensation; no comparable charge was recorded in 2019.
- In February 2019, the company borrowed $50.0 million under the OrbiMed facility, repaid the $20.0 million SVB term loan and $1.3 million SVB revolving balance, and issued $12.1 million of Series F preferred stock. The refinancing generated a $1.7 million debt-extinguishment loss.
- Accumulated deficit increased to $557.2 million from $374.8 million at December 31, 2018, substantially reflecting the $162.7 million accretion of redeemable convertible preferred stock in the first half.
Outlook, Commentary, Risks, and Unusual Items
- Management expected adjusted gross margin to improve over the long term but to fluctuate. Technology margin could decline in the near term as customer migrations to Azure continue; the planned migration was expected to be substantially complete by the end of 2020.
- Professional services margin could weaken near term because of anticipated compensation and headcount increases. Sales and marketing, research and development, and general and administrative expenses were expected to increase in absolute dollars as the company invests for growth and operates as a public company.
- Management stated that existing cash, investments, and available revolving capacity were expected to fund working capital and capital expenditures for at least the next 12 months, although additional capital could be required in the future.
- On July 29, 2019, after the reporting date, the company completed its IPO of 8.05 million shares at $26.00 per share. It reported net proceeds of $194.6 million before estimated offering costs of $4.4 million, or approximately $190.2 million after those costs. All 23.2 million outstanding preferred shares converted into common stock on a one-for-one basis.
- The IPO triggered recognition of $5.3 million of previously unrecognized stock-based compensation related to awards with service and performance conditions. The pro forma June 30 cash, cash equivalents, and short-term investments balance was $248.7 million, and pro forma stockholders’ equity was $222.1 million.
- Remaining performance obligations for contracts that did not permit cancellation within one year totaled $63.9 million at June 30, 2019; approximately 86% was expected to be recognized over the following 24 months.
- Key risks include continued net losses and accumulated deficit, dependence on customer renewals and large healthcare customers, competition, lengthy sales cycles, Azure migration and hosting costs, cybersecurity and protected-health-information exposure, healthcare regulation, intellectual-property claims, debt covenants and secured borrowings, acquisition integration, and the ability to scale operations.
- The company reported no significant outstanding litigation claims as of June 30, 2019. Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Reconcile reported revenue growth with the organic contribution and the Medicity contribution, particularly as year-over-year comparisons become less acquisition-driven in the second half of 2019.
- Track Azure migration costs, hosting expense, and Technology Gross Margin because management expects near-term margin pressure.
- Assess cash burn, recurring operating losses, interest obligations, covenant compliance, and the timing of principal payments under the OrbiMed facility.
- Confirm the post-IPO capitalization, preferred-stock conversion, IPO proceeds after all offering costs, and the effect of IPO-triggered stock-based compensation.
- Evaluate customer concentration, renewal and expansion rates, deferred revenue, remaining performance obligations, and the financial condition of major healthcare customers.
- Review the effects of healthcare privacy, cybersecurity, interoperability, FDA, HIPAA, CCPA, GDPR, and other regulatory developments on compliance costs and product demand.