Health Catalyst, Inc. annual report, FY2023

Health Catalyst, Inc. 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The request references 2023 Q4, but this filing is an annual Form 10-K and does not provide a standalone fourth-quarter income statement.

Business context

Health Catalyst provides healthcare data and analytics technology, software applications, and professional services. Its primary customers are healthcare providers and other healthcare organizations. The business is organized into Technology and Professional Services segments and generated more than 90% of revenue from recurring sources in 2023.

109 DOS Subscription Clients at December 31, 2023, compared with 98 in 2022.
More than 525 other clients, up from more than 425 in 2022, partly reflecting the October 2023 acquisition of Electronic Registry Systems, Inc. (ERS).
Technology represented 63% of revenue and Professional Services represented 37%.
No individual customer represented more than 10% of annual revenue.

Financial performance and liquidity

Metric	2023	2022	Change
Total revenue	$295.9 million	$276.2 million	Up 7%
Technology revenue	$187.6 million	$176.3 million	Up 6%
Professional services revenue	$108.4 million	$99.9 million	Up 8%
Net loss	$(118.1) million	$(137.4) million	Improved by $19.3 million
Loss from operations	$(126.9) million	$(140.0) million	Improved by $13.1 million
Adjusted EBITDA	$11.0 million	$(2.5) million	Improved by $13.5 million
Net cash used in operating activities	$(33.1) million	$(35.3) million	Improved by $2.2 million

Adjusted gross profit: $144.1 million, compared with $145.8 million in 2022.
Total adjusted gross margin: 49%, down from 53%. Technology adjusted gross margin declined to 68% from 69%; Professional Services adjusted gross margin declined to 15% from 24%.
Operating expenses: $258.7 million, down from $273.2 million, despite $21.3 million of unusual litigation costs in 2023.
Interest and other income, net: $9.1 million, compared with $1.7 million of expense in 2022, primarily due to higher interest income on short-term investments.
Cash, cash equivalents, and short-term investments: $317.7 million at year-end, compared with $363.5 million at year-end 2022.
Accounts receivable: $60.3 million, up from $48.0 million; the allowance for credit losses increased to $4.1 million from $2.3 million.
Debt: $230.0 million principal amount of 2.50% convertible senior notes due April 15, 2025; carrying value was $228.0 million at year-end.
Accumulated deficit: $1.12 billion at December 31, 2023.
Cash runway: Management believes existing cash, cash equivalents, and marketable securities are sufficient for working capital and capital expenditure needs for at least the next 12 months.

Material changes versus the prior comparable period

Revenue increased $19.7 million, driven by new and acquired clients, contractual technology fee escalators, and expanded services.
Technology revenue growth was partly offset by higher cloud hosting, licensing, and personnel costs. Azure migration and migration to a multi-tenant Snowflake and Databricks-enabled platform pressured technology margins.
Professional Services revenue increased, but its adjusted gross margin fell sharply because of lower-margin Tech-Enabled Managed Services, lower utilization, and higher personnel costs.
Sales and marketing expense declined 23% due to prior restructuring, lower stock-based compensation, and the timing of the Healthcare Analytics Summit.
Research and development expense declined 4%.
General and administrative expense increased 24%, primarily due to $21.3 million of litigation costs and changes in contingent consideration expense.
The company implemented a 2023 Restructuring Plan that reduced the global workforce by approximately 10% during the fourth quarter, with additional reductions occurring or anticipated in the first quarter of 2024.
ERS was acquired on October 2, 2023 for net cash consideration of $11.4 million. The acquisition was not material to consolidated 2023 revenue.
Dollar-based Retention Rate was 100%, unchanged from 2022 but below 112% in 2021. Management cited a large enterprise client loss, lower spending on offerings without near-term financial return, and budget pressure.

Guidance, outlook, commentary, and unusual items

Management expects continued improvement in Adjusted EBITDA, although quarterly results may fluctuate due to seasonality, non-recurring revenue, and operating-cost timing.
Management expects 2024 growth in net new DOS Subscription Clients and average subscription revenue per new client, supported by improving health-system operating margins.
Professional Services is expected to represent a higher proportion of revenue in 2024 because of demand for TEMS. This may pressure near-term gross margins but could improve longer-term EBITDA through operating leverage and client expansion.
Management expects Professional Services gross margin to remain volatile and technology gross margin to potentially decline in the near term because of Azure and platform migration costs.
At least $1.1 million of additional restructuring costs were expected in the first half of 2024, although the final amount and timing remained subject to evaluation.
The company paid $18.8 million to settle Pascal Metrics litigation in June 2023, without admitting wrongdoing. The matter was dismissed with prejudice.
Operating lease commitments totaled $25.6 million, including $3.4 million payable within 12 months. Remaining non-cancelable cloud infrastructure commitments totaled $41.5 million.
State and federal net operating loss carryforwards were approximately $505.5 million and $602.6 million, respectively, but are subject to valuation allowances and potential ownership-change limitations.
Key risks include healthcare customer budget pressure, customer churn and down-sell, lengthy sales cycles, competition, cybersecurity and privacy compliance, dependence on third-party cloud providers and data sources, margin pressure from migrations, acquisition integration, regulatory uncertainty, and the need to repay or refinance the 2025 convertible notes.

Most important facts for investors to verify

Whether Adjusted EBITDA improvement converts into sustained positive operating cash flow; 2023 operating cash flow remained negative at $33.1 million.
The company’s ability to fund, repay, refinance, or otherwise settle the $230.0 million convertible notes due in April 2025.
Trends in Dollar-based Retention Rate, customer churn, down-sell activity, and average ARR for new DOS Subscription Clients.
Whether Azure and multi-tenant platform migrations produce expected long-term efficiencies after near-term margin pressure.
Whether TEMS growth improves EBITDA while restoring Professional Services margins over time.
The recurring impact of the 2023 restructuring, including employee attrition, execution disruption, and actual cost savings.
Exposure to healthcare customer financial distress, higher credit losses, delayed collections, and reduced technology spending.
The effect of $55.8 million of stock-based compensation, $42.2 million of depreciation and amortization, $21.3 million of litigation costs, and other adjustments on the quality of non-GAAP profitability.
Potential dilution from convertible notes, equity awards, acquisition-related shares, and the employee stock purchase plan.