Health Catalyst, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Health Catalyst provides cloud-based healthcare data platforms, analytics software, and professional services primarily to healthcare providers. This filing covers the quarter and six months ended June 30, 2021; quarterly financial statements are unaudited. The comparable periods are the three and six months ended June 30, 2020.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $59.6 million | $43.3 million | $115.5 million | $88.4 million |
| Technology revenue | $35.5 million | $25.5 million | $69.4 million | $50.2 million |
| Professional services revenue | $24.1 million | $17.8 million | $46.1 million | $38.2 million |
| Net loss | $(35.8) million | $(27.2) million | $(64.2) million | $(44.7) million |
| Net loss per share | $(0.80) | $(0.71) | $(1.45) | $(1.19) |
| Adjusted EBITDA | $1.7 million | $(4.2) million | $0.8 million | $(10.2) million |
| Total adjusted gross margin | 54% | 49% | 54% | 49% |
Technology represented 60% of revenue and professional services represented 40% in both the quarter and year-to-date periods. Management stated that more than 90% of revenue is recurring.
Q2 technology adjusted gross margin was 68%, compared with 69% in the prior-year quarter. Professional services adjusted gross margin increased to 34% from 21%. For the six-month period, technology adjusted gross margin was 69% in both years, while professional services adjusted gross margin increased to 33% from 23%.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $205.1 million at June 30, 2021, compared with $92.0 million at December 31, 2020.
- Short-term investments were $57.7 million, resulting in cash, cash equivalents, and short-term investments of $262.8 million.
- Operating cash flow was negative $8.0 million for the first six months of 2021, an improvement from negative $17.5 million in the prior-year period.
- Investing activities provided $109.8 million, principally reflecting net sales and maturities of short-term investments.
- Financing activities provided $11.3 million, primarily from stock option exercises and employee stock purchases, partially offset by acquisition-related payments.
- The company had $230.0 million principal amount of 2.50% convertible senior notes due 2025, carried at $174.8 million net on the balance sheet. The notes had an estimated fair value of $441.5 million at June 30, 2021.
- The notes became convertible during the quarter ending September 30, 2021 because the stock-price conversion threshold was met. The initial conversion price was approximately $30.60 per share.
- Management stated that existing cash, cash equivalents, and marketable securities should fund working capital and capital expenditures for at least the next 12 months, although additional capital may be needed for potential acquisitions.
Material Changes Versus the Prior Comparable Period
- Revenue increased 38% in Q2 and 31% for the first six months, driven by new customers, acquired customers, contractual technology-fee escalators, expanded support offerings, and higher professional-services activity.
- Despite revenue growth, the Q2 net loss widened by $8.7 million and the six-month net loss widened by $19.5 million. Major contributors included increased stock-based compensation, acquisition-related costs, contingent consideration remeasurement, and amortization of acquired intangible assets.
- General and administrative expense increased 178% in Q2 and 111% year to date, including significant changes in the fair value of contingent consideration liabilities and acquisition-related expenses.
- Depreciation and amortization increased 163% in Q2 and 167% year to date, primarily because of intangible assets acquired in 2020 business combinations.
- Adjusted EBITDA improved to positive $1.7 million in Q2 and positive $0.8 million year to date, primarily due to revenue growth, improved adjusted gross margins, cost containment, and expense timing.
- Technology revenue grew faster than professional services revenue, increasing technology's share of six-month revenue from 57% to 60%.
- The company settled the Vitalware earn-out for $15.0 million in cash and 309,458 common shares. Total contingent consideration liabilities declined from $31.3 million at year-end 2020 to $9.5 million at June 30, 2021.
Guidance, Outlook, Commentary, and Risks
- Management expects near-term technology margins to fluctuate or decline as customers migrate from private data centers and on-premise deployments to Microsoft Azure, which has higher hosting costs. The migration is expected to be substantially complete by the end of 2022.
- Professional-services margins may decline in the near term because of service-mix changes, additional delivery overhead, and normalization of utilization rates and project-based revenue.
- Management expects Adjusted EBITDA to decline in the near term due to operating-expense seasonality, the September Healthcare Analytics Summit, higher travel costs, and the Twistle acquisition, which is expected to generate Adjusted EBITDA losses in the second half of 2021.
- COVID-19, including the Delta variant, continued to create uncertainty for healthcare-provider budgets, operations, customer renewals, collections, sales cycles, and professional-services delivery. Management believes the recurring revenue model has muted the near-term impact and may create longer-term demand for healthcare analytics.
- On July 1, 2021, after the reporting period, the company acquired Twistle, a healthcare patient-engagement SaaS company, for preliminary consideration of approximately $104.5 million, consisting of $57.5 million in cash and 830,704 shares of common stock. Additional contingent consideration and purchase-price adjustments remained subject to valuation.
- Principal risks include competition from larger healthcare, analytics, and electronic health-record vendors; customer nonrenewals or pricing pressure; long and unpredictable sales cycles; integration and execution risks from acquisitions; cybersecurity, privacy, HIPAA, GDPR, and other regulatory exposure; reliance on third-party infrastructure including Microsoft Azure; intellectual-property claims; and the company’s continued operating losses.
- The company reported no significant outstanding legal claims at June 30, 2021. 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.
Important Facts for Investors to Verify
- Whether revenue growth remains durable after incorporating acquired businesses and higher project-based professional-services revenue.
- The effect of the Azure migration on technology gross margin, hosting costs, service reliability, and customer retention.
- Whether positive Adjusted EBITDA can be sustained despite continuing GAAP losses, significant stock-based compensation, amortization, and acquisition-related costs.
- The timing and cash or equity settlement requirements associated with the convertible notes, including potential dilution from conversion.
- The final purchase accounting, contingent consideration, integration costs, and operating impact of the Twistle acquisition.
- Customer retention, technology dollar-based retention, professional-services retention, concentration, and collection trends.
- The company’s ability to fund ongoing losses, acquisitions, and the 2025 convertible-note maturity without additional financing.