Health Catalyst, Inc. 2022 Q3 Form 10-Q Summary
Business context and reporting period
Health Catalyst provides cloud-based healthcare data-platform and analytics software, together with professional services, primarily to healthcare providers. The filing covers the three and nine months ended September 30, 2022; the financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $68.4 million | $61.7 million | $207.1 million | $177.2 million |
| Technology revenue | $44.0 million | $38.3 million | $131.6 million | $107.6 million |
| Professional services revenue | $24.4 million | $23.5 million | $75.5 million | $69.6 million |
| Net loss | $(45.7) million | $(40.0) million | $(101.6) million | $(104.2) million |
| Net loss per diluted share | $(0.84) | $(0.82) | $(1.97) | $(2.27) |
| Adjusted EBITDA | $(4.6) million | $(5.8) million | $(1.9) million | $(5.0) million |
| Total adjusted gross margin | 51% | 51% | 54% | 53% |
Q3 revenue increased 11% year over year, led by 15% technology growth and 4% professional services growth. Nine-month revenue increased 17%, with technology revenue representing 64% of total revenue versus 61% in the prior-year period.
Q3 loss from operations was $45.7 million, compared with $42.2 million in Q3 2021. Nine-month operating loss was $103.3 million, compared with $98.9 million. Q3 operating expenses increased to $77.7 million from $70.9 million, primarily reflecting higher sales and marketing, research and development, and depreciation and amortization costs. Depreciation and amortization increased 16% in Q3 and 38% for the first nine months, largely because of acquired intangible assets.
Adjusted technology gross margin declined to 68% in Q3 from 70%, while adjusted professional services gross margin remained 20%. For the first nine months, adjusted technology gross margin improved to 70% from 69%, but adjusted professional services gross margin declined to 26% from 28%. Technology margin pressure primarily reflected Microsoft Azure migration and higher support and hosting costs.
At September 30, 2022, cash and cash equivalents were $124.2 million and short-term investments were $255.9 million, totaling $380.1 million of liquidity. Accounts receivable were $49.5 million and total deferred revenue was $56.7 million. The company reported $226.1 million of net carrying value for its 2.50% convertible senior notes due 2025, with $230.0 million principal outstanding. The notes are senior unsecured obligations, carry no financial covenants, and were not convertible at the reporting date.
For the first nine months, operating cash flow was $(20.4) million versus $(13.3) million in the prior-year period. Investing cash flow was $(45.3) million, including $27.8 million for acquisitions and $10.0 million for capitalized internal-use software. Financing cash flow was $(3.3) million, including $8.4 million of share repurchases. Cash and cash equivalents declined by $69.0 million to $124.2 million during the period. 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, although additional capital may be required in the future.
Material changes versus the prior comparable period
- Revenue growth was driven by new customers, acquired customers, contractual technology fee escalators, and expanded support offerings.
- Management reported longer sales cycles, delayed healthcare purchasing decisions, reduced customer spending, and lower-than-anticipated dollar-based retention because of customer budget pressure.
- A large enterprise DOS subscription customer was lost during the first half of 2022; management characterized this as an isolated customer-specific event.
- Professional services and selected modular technology customers reduced spending, contributing to sequential declines in Q3 revenue and Adjusted EBITDA from Q2 2022.
- Health Catalyst acquired KPI Ninja for approximately $21.4 million in February 2022 and ARMUS for approximately $9.4 million in April 2022. The acquisitions were integrated immediately and did not materially contribute identifiable revenue in the reported periods.
- The company adopted ASU 2020-06 on January 1, 2022. The adoption increased the convertible-notes carrying value by approximately $44.0 million, reduced additional paid-in capital by $61.2 million, and reduced accumulated deficit by $17.2 million. It also materially reduced non-cash interest expense.
- In August 2022, the board authorized a $40.0 million share-repurchase program. The company repurchased 709,139 shares for $8.4 million at an average price of $11.81 per share, leaving $31.6 million authorized.
- The company initiated a restructuring plan focused on reducing investment in its life sciences business and reducing senior leadership. It recorded $4.5 million of restructuring costs in Q3, had $2.0 million of related liabilities outstanding at September 30, and expected additional restructuring costs of at least $2.0 million in Q4 2022.
- Q3 included a $3.7 million impairment charge related to subleased headquarters space, compared with $1.8 million in Q3 2021.
- All acquisition-related contingent consideration liabilities were settled by September 30, 2022.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical revenue or earnings guidance range. Management expects revenue and Adjusted EBITDA to stabilize over time but cautioned that both could decline sequentially in Q4 2022. Management expects Adjusted EBITDA to improve over the longer term through revenue growth and cost-reduction initiatives.
Management expects challenging healthcare-sector finances, inflation, labor costs, COVID-19 effects, and rising interest rates to persist for at least the next several quarters. These conditions have elongated sales cycles and may continue to pressure bookings, retention, customer spending, collections, and professional services utilization.
Management is continuing research and development investment while pursuing operating leverage through cost reductions, offshore and nearshore labor, strategic partners, and changes to professional services delivery. The Azure migration was expected to be substantially complete by the end of 2022, but management warned that migration costs may continue to pressure technology gross margins in the near term.
Key risks include intense competition; customer non-renewal or spending reductions; dependence on third-party data sources and Microsoft Azure; cybersecurity, privacy, HIPAA, and other healthcare regulatory requirements; software defects or inaccurate analytics that could lead to liability; acquisition integration and impairment risk; employee retention; continued operating losses and cash consumption; and the need to repay or refinance the convertible notes at maturity in 2025.
Management stated that legal proceedings are in the ordinary course and that there were no significant outstanding claims as of September 30, 2022. Disclosure controls and procedures were assessed as effective at the reasonable assurance level, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether bookings, dollar-based retention, customer spending, and sales-cycle trends improved after the reported Q3 pressure.
- The pace and final cost of the Azure migration and its effect on technology gross margin.
- Actual Q4 and full-year restructuring costs, cash payments, and realized cost savings.
- Whether Adjusted EBITDA improvement can continue while the company remains GAAP unprofitable and uses cash in operations.
- The remaining $31.6 million share-repurchase authorization and its effect on liquidity and share count.
- Integration performance and revenue contribution from KPI Ninja and ARMUS, including potential goodwill or intangible-asset impairment.
- The company’s ability to fund operations and address the $230.0 million convertible-note principal due in 2025.
- Customer concentration, renewal activity, healthcare-sector credit conditions, and potential increases in credit losses or contract cancellations.