Health Catalyst, Inc. 10-Q Summary
Business context and reporting period
Health Catalyst provides cloud-based healthcare data platforms, analytics applications, and professional services primarily to healthcare providers. This Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $73.2 million | $70.6 million | $147.1 million | $138.7 million |
| Technology revenue | $47.3 million | $45.4 million | $94.5 million | $87.6 million |
| Professional services revenue | $25.9 million | $25.2 million | $52.6 million | $51.1 million |
| Loss from operations | $(34.6) million | $(33.2) million | $(69.5) million | $(57.5) million |
| Net loss | $(32.6) million | $(33.4) million | $(65.8) million | $(55.9) million |
| Diluted net loss per share | $(0.58) | $(0.62) | $(1.18) | $(1.15) |
| Adjusted EBITDA | $3.5 million | $2.0 million | $7.7 million | $2.7 million |
Technology represented 65% of Q2 revenue and 64% for the six-month period. More than 90% of revenue is recurring, according to management.
Adjusted gross margin declined to 50% in Q2 and 51% for the six months, compared with 55% in both comparable 2022 periods. Q2 adjusted technology gross margin was 68%, versus 70%, while adjusted professional services gross margin was 17%, versus 27%. The decline reflected higher hosting and license costs, Azure and platform migrations, increased Tech-enabled Managed Services mix, and lower professional-services utilization.
Cash used in operating activities was $17.2 million for the six months ended June 30, 2023, compared with $8.4 million in the prior-year period. Investing activities provided $15.2 million, primarily from net short-term investment maturities and purchases. Cash and cash equivalents decreased by $0.6 million to $115.7 million. Cash, cash equivalents, and short-term investments totaled $343.8 million.
The company had $230.0 million principal amount of 2.50% convertible senior notes due April 2025, recorded at a net carrying value of $227.3 million. The notes had an estimated fair value of $220.0 million and were not currently convertible as of June 30, 2023. Management stated that existing liquidity should meet working-capital and capital-expenditure needs for at least the next 12 months.
Material changes versus the prior comparable period
- Q2 revenue increased 4%; six-month revenue increased 6%, driven by new clients, acquired clients, contractual technology fee escalators, and expanded services.
- Technology revenue grew 4% in Q2 and 8% for the six months; professional services revenue grew 3% in both comparisons.
- Q2 and six-month net losses remained significant. The six-month net loss increased by $9.9 million year over year, despite higher revenue.
- Sales and marketing expense decreased 22% in Q2 and 16% for the six months, primarily due to lower headcount, stock-based compensation, and contractor costs.
- General and administrative expense increased 35% in Q2 and 80% for the six months, principally because of litigation costs and a lease-related impairment charge.
- Interest and other income improved substantially because higher market interest rates increased income on short-term investments.
- Stock-based compensation declined to $14.6 million in Q2 and $28.5 million for the six months, from $17.9 million and $36.1 million, respectively.
- The company repurchased 145,027 shares for $1.8 million during the six months. Approximately $29.8 million remained available under the $40.0 million repurchase authorization.
Guidance, outlook, risks, and unusual items
Management expects full-year 2023 professional-services growth to slightly outpace technology growth, with a higher proportion of bookings expected in the second half of the year. New DOS subscription clients are expected to have average starting subscription revenue toward the low end of the previously stated $500,000 to $1.5 million range.
Management expects near-term pressure on total and technology gross margins from Azure hosting and platform migrations and on professional-services margins from a greater mix of lower-margin Tech-enabled Managed Services. Management nevertheless expects Adjusted EBITDA to improve over time through revenue growth, restructuring benefits, operating leverage, and improved efficiency in managed services.
Healthcare customers continue to face inflation, labor and supply-cost pressures, high interest rates, constrained budgets, longer sales cycles, and elevated churn. Management reported relatively stronger demand for offerings with clear, near-term financial return on investment, while clinically focused offerings and traditional consulting services have faced more pressure.
In June 2023, the company settled Pascal Metrics litigation for $18.8 million without admitting wrongdoing. The matter was dismissed with prejudice, and the settlement was paid on June 27, 2023. Litigation costs recognized in the six-month period totaled $21.3 million, including costs associated with this matter.
The company recorded a $2.7 million impairment charge on office space and leasehold improvements designated for subleasing. Six-month restructuring costs were $2.1 million, and cumulative restructuring charges through June 30, 2023 were $10.5 million.
Principal risks include competition, client non-renewal and churn, healthcare-provider financial stress, reliance on third-party data and Microsoft Azure, cybersecurity and privacy obligations, healthcare regulation, intellectual-property claims, execution of restructuring and platform migrations, continued operating losses, liquidity requirements associated with the 2025 convertible notes, and potential dilution from equity awards and note conversion.
Important facts for investors to verify
- Whether revenue growth and second-half bookings materialize despite longer sales cycles, budget pressure, and elevated churn.
- Whether the shift toward Tech-enabled Managed Services improves Adjusted EBITDA while exerting further pressure on gross margins.
- The pace and cost of Azure and Snowflake/Databricks platform migrations and their effect on technology gross margin and client retention.
- Operating cash burn and the company’s ability to fund operations and address the $230.0 million convertible notes due in 2025.
- Whether litigation, privacy, cybersecurity, data-access, and healthcare-regulatory exposures create additional costs or liabilities.
- The continuing effect of stock-based compensation, equity issuance, repurchases, and potentially dilutive securities on per-share value.