Health Catalyst, Inc. Q1 FY2023 earnings

Health Catalyst reported total revenue of $73.9 million for the first quarter of fiscal 2023, up 8.5% from $68.1 million in the prior-year quarter. The top line grew, but profitability moved the other way. The company posted a net loss of $33.2 million, wider than the $22.5 million loss a year earlier, and a diluted loss per share of $0.60 against $0.54. Operating loss reached $34.9 million versus $24.3 million, and operating margin fell to -47.3% from -35.8%.

The swing in the loss came largely from items below the revenue line. General and administrative expense rose 170%, driven by $11.7 million of litigation costs outside the ordinary course of business and by an $8.4 million gain on contingent consideration recorded in the prior-year period that did not repeat. Restructuring costs added $2.1 million. Stock-based compensation fell to $13.9 million from $18.1 million, which softened the blow.

Non-GAAP measures paint a better picture. Adjusted EBITDA was $4.2 million, up from $0.7 million a year earlier, and management said revenue and Adjusted EBITDA both landed above the midpoint of its quarterly guidance. Adjusted Net Income was $3.1 million, or $0.05 per diluted share, compared with an Adjusted Net Loss of $3.0 million, or $0.06 per share. Margin pressure is still visible. Total Adjusted Gross Margin slipped to 52% from 55%, and Adjusted Professional Services Gross Margin dropped to 20% from 29% as Tech-enabled Managed Services, which start at lower margins, took a larger share of the mix. Adjusted Technology Gross Margin held at 70%.

The clearest commercial win was an expansion of the Tech-enabled Managed Services partnership with Allina Health, the company's longest-standing client. The added chart abstraction work lifts Allina's recurring revenue to roughly $11 million per year. Backlog also improved. Remaining performance obligations were $128.1 million, up 59.7% from a year earlier, and deferred revenue was $66.1 million, up 5.9%. Technology accounted for 64% of total revenue and professional services for 36%, and management notes that more than 90% of revenue is recurring.

Guidance for the second quarter of 2023 calls for Adjusted EBITDA of $0.75 million to $4.75 million. For the full year 2023, the company expects Adjusted EBITDA of $9.0 million to $11.0 million. Health Catalyst also gave a total revenue outlook for both periods, a GAAP measure, but it did not reconcile the Adjusted EBITDA outlook to net loss, pointing to items such as stock-based compensation that it cannot reasonably forecast.

Cash generation turned negative. Operating cash flow was a use of $5.6 million, compared with $1.2 million provided in the prior-year quarter. Capital expenditures were $0.4 million, up 19.4%. Cash, cash equivalents and short-term investments totaled $356.9 million at March 31, 2023. The company repurchased 145,027 shares for $1.8 million at an average price of $12.45, leaving $29.8 million under its authorization, and it carries $230.0 million of 2.50% convertible senior notes due 2025.

The macro backdrop is the main risk. Health systems face higher labor and supply costs without matching revenue, and Health Catalyst says it has seen lower pipeline demand and elevated churn, mostly in offerings without near-term financial return, such as clinically focused technology and traditional consulting. Management expects that churn to be weighted toward the first half of 2023 and a larger share of net bookings to land in the second half. Other named risks include the loss of key clients or partners, litigation, a security incident, regulatory changes, and difficulty recruiting and retaining staff. The company also holds $591.6 million of federal and $462.9 million of state net operating loss carryforwards as of December 31, 2022, which ownership changes could limit.