Health Catalyst, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Health Catalyst provides healthcare organizations with a cloud-based data platform, analytics software, and professional services. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company had more than 1,000 team members and 42.5 million common shares outstanding as of October 31, 2020.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total revenue | $47.2 million | $39.4 million | 20% |
| Technology revenue | $28.0 million | $21.2 million | 32% |
| Professional services revenue | $19.2 million | $18.3 million | 5% |
| Net loss | $(27.3) million | $(21.4) million | Loss increased |
| Loss from operations | $(23.5) million | $(20.7) million | Loss increased |
| Adjusted EBITDA | $(6.4) million | $(8.4) million | Improved |
| Adjusted gross margin | 51% | 54% | Down 3 points |
For the nine months ended September 30, 2020, revenue was $135.6 million versus $111.4 million in 2019, a 22% increase. Technology revenue increased 27% to $78.2 million, while professional services revenue increased 15% to $57.4 million. Net loss was $72.0 million versus $45.8 million, and Adjusted EBITDA improved to $(16.6) million from $(20.9) million.
Q3 technology gross margin was 68%, unchanged from the prior-year quarter. Professional services gross margin declined to 25% from 37%, primarily due to COVID-19-related customer discounts, lower professional services dollar-based retention, and service mix. Nine-month adjusted professional services gross margin declined to 24% from 35%.
Operating expenses were $46.3 million in Q3, up from $41.5 million. Depreciation and amortization increased 115% to $5.0 million, primarily because of acquired intangible assets. Stock-based compensation was $9.5 million in Q3 and $27.3 million for the nine-month period.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $111.2 million and short-term investments were $163.9 million at September 30, 2020, for total cash, cash equivalents, and short-term investments of $275.1 million.
- Operating cash flow was negative $22.0 million for the first nine months of 2020, compared with negative $19.1 million in the prior-year period.
- Investing cash flow was negative $60.7 million, including $102.5 million for acquisitions and $3.3 million for property, equipment, and intangible assets, partially offset by investment maturities and sales.
- Financing cash flow was positive $175.9 million, principally reflecting $222.5 million of net proceeds from convertible senior notes, offset by the $57.0 million repayment of the OrbiMed credit facility and $21.7 million for capped calls.
- The company issued $230.0 million of 2.50% senior unsecured convertible notes due April 2025. The notes had a $166.2 million net carrying value at September 30, 2020 and an initial conversion price of approximately $30.60 per share.
- The OrbiMed term loan and Silicon Valley Bank revolving facility were repaid or terminated during April 2020. Long-term debt at September 30, 2020 was $166.2 million.
- The company recorded an $8.5 million loss on extinguishment of debt during the first nine months, including $7.0 million of repayment fees.
- Total assets were $570.7 million and total stockholders’ equity was $299.6 million at September 30, 2020.
Management stated that existing cash, cash equivalents, marketable securities, and available credit resources were expected to 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 accelerated through technology subscriptions and acquired businesses, while the revenue mix shifted toward technology, which represented 59% of Q3 revenue versus 54% in Q3 2019.
- Profitability under GAAP worsened because of higher depreciation and amortization, interest expense, acquisition costs, and other operating expenses, despite improved Adjusted EBITDA.
- The company completed acquisitions of Able Health, Healthfinch, and Vitalware for aggregate consideration of approximately $191.2 million. These transactions added $104.1 million of goodwill and materially increased intangible assets.
- Acquisition-related stock and contingent consideration increased dilution and future payment obligations. Contingent consideration liabilities totaled $16.2 million at September 30, 2020.
- The new acquisitions and other factors increased acquired intangible amortization and general and administrative costs. Acquisition transaction costs were $2.7 million for the first nine months.
- The company entered into a new South Jordan, Utah headquarters lease with approximately $31.7 million of required lease payments, excluding additional future expansion payments, and expects more than $10 million of capital expenditures for improvements and equipment.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide a clear numerical revenue or Adjusted EBITDA guidance range. Management expects COVID-19 to have a relatively muted near-term effect on total revenue because more than 90% of revenue is recurring and technology contracts generally include annual escalators. However, management expects substantially lower full-year 2020 professional services dollar-based retention than historically achieved and acknowledged that new customer additions were below initial expectations because of healthcare customers’ financial, operational, and procurement disruptions.
- COVID-19 continues to create risks to customer spending, renewals, collections, professional services utilization, and new sales cycles, while increased healthcare focus on data and analytics may provide a longer-term demand tailwind.
- Transitioning customers to Microsoft Azure is expected to improve functionality but increase hosting costs and create near-term pressure on technology gross margins. The company expected the planned migrations to be substantially complete by the end of 2020.
- Acquisition integration, cross-selling, customer retention, and the performance of acquired businesses remain important execution risks. Medicity customers have historically generated lower dollar-based retention, and management expects flat to declining Medicity revenue in the foreseeable future.
- The company remains loss-making and has an accumulated deficit of $682.6 million at September 30, 2020. It expects continued losses and may need additional financing.
- Key risks include competition, long healthcare sales cycles, dependence on customer renewals, data access and privacy compliance, cybersecurity, third-party hosting providers, intellectual property claims, healthcare regulation, acquisition integration, employee retention, and the ability to repay or settle the convertible notes.
- No significant outstanding litigation claims were reported at September 30, 2020, although ordinary-course legal proceedings may arise.
- Disclosure controls and procedures were deemed effective at the reasonable assurance level, and management reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether COVID-19-related pressure on professional services retention, discounts, and new customer additions persists or reverses.
- Progress and cost impact of the Microsoft Azure migration, including its effect on technology gross margin.
- Integration results, revenue contribution, retention, and impairment risk associated with Able Health, Healthfinch, Vitalware, and prior acquisitions.
- Cash burn and the adequacy of the $275.1 million cash and short-term investment balance relative to continuing operating losses, headquarters capital expenditures, contingent consideration, and the 2025 convertible notes.
- Potential dilution from the convertible notes, capped-call structure, stock options, restricted stock units, acquisition shares, and contingent consideration.
- Whether Adjusted EBITDA improvement translates into sustainable GAAP operating leverage, given continued stock-based compensation, amortization, acquisition costs, and other excluded items.
- Future professional services and total adjusted gross margins, which declined materially year over year.