Summary
Health Catalyst reported second quarter 2023 revenue of $73.2 million, up 3.7% from the prior-year quarter. First half revenue reached $147.1 million, up 6.0% year over year. The company also posted Adjusted EBITDA of $3.5 million, up 76%, and said Adjusted EBITDA margin increased to about 5%, an improvement of about 200 basis points compared with the second quarter of 2022. Management raised its full year outlook for revenue and Adjusted EBITDA while reiterating its full year bookings expectations. The quarter showed steady top-line growth and better non-GAAP profitability, but GAAP losses remained large.
Net loss narrowed 2.4% to $32.6 million for the quarter. Operating loss widened 4.3% to $34.6 million, and operating margin was -47.3%, down 0.3 percentage points year over year. Diluted loss per share was -$0.58, a 6.5% narrowing from the prior-year quarter. For the first six months, net loss widened 17.7% to $65.8 million, operating loss widened 20.8% to $69.5 million, and diluted loss per share was -$1.18, a 2.6% widening. Operating cash flow was -$11.6 million for the quarter, down 20.9%, and -$17.2 million for the first half, down 103.8%. Capital expenditures were $0.4 million in the quarter, up 101.5%, and $0.8 million for the first half, up 49.1%. Deferred revenue was $59.6 million, down 2.9% year over year, while remaining performance obligations were $122.9 million, up 15.9%. Total Adjusted Gross Margin was 50%, down from 55%. Adjusted Technology Gross Margin was 68%, down from 70%, and Adjusted Professional Services Gross Margin was 17%, down from 27%.
Operationally, Health Catalyst pointed to strong first half bookings that were consistent with expectations and a growing pipeline. From 7/1/22 through 6/30/23, Tech-Enabled Managed Services ARR grew 80% and now represents nearly 50% of total Professional Services ARR. Long-term TEMS partnerships average $8 million of total ARR per client, about 4x larger than the average ARR per DOS subscription client. The company announced two recent TEMS wins. One is a 5-year, approximately $50 million contract with a long-standing regional health system client. It includes All-Access Technology and TEMS in ambulatory operations, roughly quintuples the client relationship, and has annual spend equal to about 5% of the client's net patient revenue, with an opportunity for shared success bonuses. The other is a 5-year, approximately $60 million contract with a long-standing health system client. It includes All-Access Technology and TEMS in chart abstraction and analytics for clinical improvement and health equity, and roughly doubles the relationship to about $12 million of ARR, making the client one of Health Catalyst's five largest clients.
Guidance calls for third quarter 2023 Adjusted EBITDA between $0.0 million and $2.5 million. For the full year 2023, management guided Adjusted EBITDA between $10.0 million and $12.0 million, which is up $1 million compared with the midpoint of prior full year guidance of $9.0 million to $11 million. The company reiterated its full year 2023 bookings expectations, including net new DOS subscription client additions in the low double digits and a dollar-based retention rate of 102% to 110%. Long-term targets remain 20%+ revenue growth and a 20%+ Adjusted EBITDA margin.
Risks remain tied to the challenging macroeconomic environment, including high inflation, high interest rates, and a tight labor market. Health systems are still under financial strain from higher labor and supply costs without matching revenue, which pressures their budgets. Management said pipeline demand is lower than before the 2022 macro pressures and that churn has been elevated, particularly for offerings without near-term financial ROI. The company expects a higher proportion of bookings from existing clients and lower average starting ARR for new DOS Subscription Clients. Litigation costs and non-recurring lease-related charges also weighed on general and administrative expenses. The mix shift toward Tech-Enabled Managed Services is expected to lower Adjusted Professional Services Gross Margin and Total Adjusted Gross Margin in future years, even as the model is expected to support Adjusted EBITDA through operating leverage.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $73.2M | $73.9M | -0.9% | $70.6M | +3.7% |
| Research & development | $17.6M | $17.1M | +3.0% | $18.1M | -3.1% |
| Sales & marketing | $16.4M | $18.6M | -11.7% | $20.9M | -21.6% |
| General & administrative | $23.7M | $23.8M | -0.7% | $17.5M | +35.0% |
| Total operating expenses | $68.4M | $70.5M | -3.0% | $69.2M | -1.2% |
| Operating income (loss) | -$34.6M | -$34.9M | +0.8% | -$33.2M | -4.3% |
| Operating margin | -47.3% | -47.3% | -0.0 pp | -47.0% | -0.3 pp |
| Net income (loss) | -$32.6M | -$33.2M | +1.7% | -$33.4M | +2.4% |
| Net margin | -44.5% | -44.9% | +0.4 pp | -47.3% | +2.8 pp |
| Diluted EPS | -$0.58 | -$0.60 | +$0.02 | -$0.62 | +$0.04 |
Risks
Health system end market is under financial strain from high inflation and high interest rates, with labor and supply costs rising without commensurate revenue, leading to margin pressure. MD&A reports a decrease in pipeline demand versus the prior period and elevated realized and anticipated churn, primarily for offerings without near-term financial ROI.
The sales cycle for a new DOS Subscription Client is estimated at approximately one year and in some cases has exceeded two years, and the company started to experience lengthening in 2022. MD&A also expects a higher proportion of net bookings in the second half of 2023 and lower average starting ARR for new DOS Subscription Clients.
Revenue mix is shifting toward Tech-enabled Managed Services and professional services, which start at lower gross margins. Total Adjusted Gross Margin decreased from 55% to 50% for the three months ended June 30, 2023 and from 55% to 51% for the six months ended June 30, 2023; Adjusted Professional Services Gross Margin decreased from 27% to 17% for the quarter and from 28% to 19% for the six months.
MD&A cites elevated technology churn levels for DOS Subscription Clients, primarily for parts of the Solution that do not offer near-term financial ROI, including some smaller, more modular DOS relationships, and expects aggregate churn in 2023 to be more heavily weighted toward the first half. Deferred revenue was $59.60 million, down 2.9% versus the prior-year quarter.
General and administrative expenses increased 35% for the three months ended June 30, 2023 and 80% for the six months ended June 30, 2023, driven in part by $9.6 million and $21.3 million of litigation costs outside the ordinary course, respectively. Future litigation could be costly, time-consuming, and result in additional liabilities.
The healthcare analytics market is intensely competitive, with competitors including Epic Systems, Cerner, Optum Analytics, IBM, point solution vendors, and healthcare organizations performing their own analytics. Increased competition is likely to result in pricing pressures that could negatively impact sales, profitability, or market share.
The company relies on a limited number of clients for a significant portion of revenue. Its three largest clients during 2022 comprised 4.1%, 3.7%, and 3.4% of revenue, or 11.2% in the aggregate, and the loss, termination, or renegotiation of any large client contract could negatively impact results.
Competition for senior sales executives and software engineers is intense, and the company depends on key executives. Several senior leaders are active members of the Church of Jesus Christ of Latter-Day Saints, and the risk factor notes that a call to serve could require leave; COO Paul Horstmeier stepped down effective March 31, 2023.
The company has made multiple acquisitions, including ARMUS and KPI Ninja in 2022 and Twistle in 2021, and may pursue more. Integration may divert management attention, incur costs, fail to achieve anticipated benefits, or lead to impairment charges on acquired goodwill and intangible assets.
The company is executing cost reduction and restructuring initiatives, with $2.1 million of restructuring costs in the six months ended June 30, 2023. It may not realize expected benefits, and implementation may disrupt operations or cost more or take longer than anticipated.
MD&A expects new 2023 DOS Subscription Clients to have lower average starting ARR toward the low end of the $500,000 to $1,500,000 range, driven by greater interest for stand-alone DOS module components such as Healthcare.AI, which generate significantly lower subscription revenue than enterprise access contracts.
SaaS KPIs
All quarters →Adjusted EBITDA
Adjusted Professional Services Gross Margin
Adjusted Technology Gross Margin
Total Adjusted Gross Margin
Adjusted Professional Services Gross Profit
Adjusted Technology Gross Profit
Total Adjusted Gross Profit
Summary, forecast, risks and KPIs are extracted from Health Catalyst, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.