Health Catalyst, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Health Catalyst provides cloud-based healthcare data and analytics technology, analytics applications, and professional services primarily to healthcare providers. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparison to the three months ended March 31, 2020. The company operates in Technology and Professional Services segments.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $55.8 million | $45.1 million | Up 24% |
| Technology revenue | $33.8 million | $24.7 million | Up 37% |
| Professional services revenue | $22.0 million | $20.4 million | Up 8% |
| Net loss | $28.4 million | $17.5 million | Loss increased |
| Loss per share | $0.65 | $0.47 | Loss increased |
| Adjusted EBITDA | $(0.8) million | $(6.0) million | Improved |
| Adjusted gross margin | 54% | 49% | Improved |
| Net cash used in operating activities | $3.1 million | $16.8 million | Use decreased |
Technology represented 61% of revenue, compared with 55% in the prior-year quarter; professional services represented 39%, compared with 45%. Adjusted Technology Gross Margin was 69% in both periods, while Adjusted Professional Services Gross Margin increased to 31% from 25%.
Operating expenses were $52.8 million, up from $39.2 million. Depreciation and amortization increased to $7.8 million from $2.9 million, primarily because of amortization of acquired intangible assets. Stock-based compensation increased to $13.5 million from $8.7 million. Interest and other expense increased to $4.0 million from $0.6 million, primarily due to non-cash amortization of debt discounts and issuance costs related to the convertible notes.
At March 31, 2021, cash and cash equivalents were $132.6 million, short-term investments were $133.8 million, and total liquidity was approximately $266.4 million. Total assets were $571.2 million and total stockholders’ equity was $268.8 million. Accounts receivable were $45.9 million and total deferred revenue was $52.8 million.
The company had $230.0 million principal amount of 2.50% convertible senior notes due 2025, with a net carrying value of $171.9 million. Because conversion conditions were satisfied, the notes were classified as current liabilities at March 31, 2021. The notes had an initial conversion price of approximately $30.60 per share and were convertible during the quarter ending June 30, 2021. The company also had $32.4 million of contingent consideration liabilities.
Cash Flow and Liquidity
- Operating cash flow use improved to $3.1 million from $16.8 million, despite the larger net loss, due largely to non-cash depreciation, stock-based compensation, debt discount amortization, and changes in working capital.
- Investing activities provided $37.4 million, primarily reflecting proceeds from sales and maturities of short-term investments, partially offset by capital expenditures and software and intangible asset purchases.
- Financing activities provided $6.4 million, principally from stock option exercises and employee stock purchase plan proceeds, net of acquisition-related payments.
- Cash and cash equivalents increased by $40.7 million during the quarter to $132.6 million.
- Management stated that existing cash, cash equivalents, and marketable securities 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 increased 24%, led by new customers, acquired technology customers, contractual annual escalators, expanded support offerings, and higher implementation and analytics activity.
- Technology revenue grew faster than professional services revenue, increasing the technology mix and supporting the improvement in total adjusted gross margin.
- Net loss widened by $10.9 million, primarily due to higher operating expenses, increased amortization of acquired intangible assets, higher stock-based compensation, contingent consideration remeasurement expense, and higher interest expense.
- Adjusted EBITDA improved by $5.1 million, reflecting revenue growth and operating leverage despite continued GAAP losses.
- General and administrative expense increased 55% to $15.0 million, including a $2.2 million increase in the fair value of contingent consideration liabilities and higher stock-based compensation.
- The company settled the Able Health contingent consideration during the quarter. It expected to settle the Vitalware earn-out during the quarter ending June 30, 2021, with an anticipated payment of approximately $15.0 million in cash and issuance of approximately 309,458 common shares.
- Revenue from contracts with customers located in the United States represented 99.9% of total revenue in both periods.
Guidance, Outlook, Commentary, and Risks
The filing does not provide clear numerical revenue or earnings guidance. Management expects to continue investing in sales and marketing, research and development, customer support, and product development. It expects these expenses to increase in absolute dollars over time but generally decline as a percentage of revenue over the long term.
Management reported that more than 90% of revenue was recurring and that COVID-19 had a relatively muted effect on revenue and technology dollar-based retention through the quarter. It also stated that customer platform usage had increased and that the pandemic could support longer-term healthcare adoption of commercial data and analytics solutions. However, COVID-19 remained a source of uncertainty, including potential effects on customer spending, renewals, collections, sales cycles, professional services delivery, and profitability.
The company is transitioning customers from its private data center and on-premise deployments to Microsoft Azure. The transition is expected to be substantially complete by the end of 2022, but management expects higher near-term hosting costs and pressure on technology gross margin. The filing also notes potential migration-related service disruptions and customer dissatisfaction.
Key risks include continued operating losses and cash needs; the ability to repay, refinance, or settle convertible notes in cash; customer concentration, renewals, and lengthy sales cycles; integration and performance risks from the Able Health, Healthfinch, and Vitalware acquisitions; contingent consideration obligations; intense competition; cybersecurity, privacy, HIPAA, and healthcare regulatory exposure; dependence on third-party hosting providers; intellectual property claims; employee retention; and potential dilution from equity awards, acquisitions, contingent consideration, or note conversion.
The company reported no significant outstanding litigation claims at March 31, 2021. Management concluded that disclosure controls and procedures were effective at the reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile the 24% revenue growth with customer additions, acquired businesses, renewal rates, and technology dollar-based retention.
- Monitor the path from negative GAAP operating results and net loss to sustainable positive operating cash flow and profitability.
- Assess the effect of the Microsoft Azure migration on technology gross margin, service reliability, and implementation costs through the expected 2022 completion.
- Verify the final Vitalware earn-out settlement, including cash paid and shares issued, and the remaining Healthfinch contingent consideration.
- Evaluate liquidity relative to the $230.0 million convertible notes, including potential cash settlement, conversion, refinancing, or dilution.
- Track acquisition integration, cross-selling performance, customer retention, and the contribution and margin profile of acquired businesses.
- Review the effect of stock-based compensation, acquired-intangible amortization, and other non-GAAP adjustments when assessing underlying economics.
- Consider COVID-19, healthcare spending, data privacy and security, regulatory compliance, customer concentration, and third-party hosting risks.