Health Catalyst (NASDAQ:HCAT) Posts Better-Than-Expected Sales In Q3

Full Report / January 11, 2023
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Healthcare software provider Health Catalyst (NASDAQ:HCAT) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 10.7% year on year to $68.3 million. The company expects that next quarter's revenue would be around $67.9 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Health Catalyst made a GAAP loss of $45.7 million, down on its loss of $40 million, in the same quarter last year.

Health Catalyst (HCAT) Q3 FY2022 Highlights:

  • Revenue: $68.3 million vs analyst estimates of $66.8 million (2.33% beat)
  • EPS (non-GAAP): -$0.13 vs analyst estimates of -$0.19
  • Revenue guidance for Q4 2022 is $67.9 million at the midpoint, below analyst estimates of $68.3 million
  • Free cash flow was negative $16.2 million, compared to negative free cash flow of $9.77 million in previous quarter
  • Gross Margin (GAAP): 46.8%, in line with same quarter last year

Founded by healthcare professionals Tom Burton and Steve Barlow in 2008, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology to healthcare organizations, enabling them to improve care and lower costs.

Healthcare sector is undergoing a major digital transformation, but as funds are poured into the digitization of health care records and processes, organizations are confronted with the reality that gathering the data is just the first step toward actually lowering costs and improving care, and the real challenge is making that information useful. To be able to succeed in today’s healthcare environment, hospitals need data from 50 to 150 different sources, but often or able to access less than 10, as they are typically running a number of siloed systems that are unable to communicate with each other and are generating data that is very difficult to query and analyze.

To solve these problems, Health Catalyst provides a centralized software platform that enables organizations to aggregate data from healthcare sources inside and outside of the hospital and manage it all in one place. This data then flows into Health Catalyst’s data analysis software that has been tailored for healthcare use and is even able to provide organizations with AI-enabled predictive capabilities that are powered by data that Health Catalyst accumulated from more than 100 million patient records. And because hospitals are often struggling with enough competent IT personnel, a large part of the business is providing expert services to help healthcare providers derive meaningful insights and actually improve patient outcomes, reduce healthcare costs and enhance customer experience.

For example, a small hospital in Louisiana was within six months able to decrease sepsis mortality rate to half of the national average. Sepsis is a growing problem in the United States, and it is a serious medical condition caused by a strong immune response to infection that can lead to very severe and potentially fatal outcomes. The hospital set up a new screening tool and an online dashboard that showed them how often the sepsis treatment protocol is applied, how well the screening is done, and how quickly the physicians are getting to see the patients. Then they used Health Catalyst to help them identify cases that need further scrutiny and zoom in on individual patients and providers, and intervene as needed.

Organizations generate a lot of data that is stored in silos, often in incompatible formats, making it slow and costly to extract actionable insights, which in turn drives demand for modern cloud-based data analysis platforms that can efficiently analyze the silo-ed data.

Health Catalyst competes with Epic Systems, Cerner (NASDAQ:CERN), and IBM (NYSE:IBM), as well as general-purpose data management platforms such as Snowflake (NYSE:SNOW), Teradata (NYSE:TDC), and Cloudera (NYSE:CLDR).

Sales Growth

As you can see below, Health Catalyst's revenue growth has been strong over the last two years, growing from quarterly revenue of $47.1 million in Q3 FY2020, to $68.3 million.

Health Catalyst Total Revenue

This quarter, Health Catalyst's quarterly revenue was once again up 10.7% year on year. But the revenue actually decreased by $2.27 million in Q3, compared to $2.54 million increase in Q2 2022. Shareholders might want to pay closer attention to this as the management is guiding for the decline in sales to continue in the coming quarter

Guidance for the next quarter indicates Health Catalyst is expecting revenue to grow 4.91% year on year to $67.9 million, slowing down from the 21.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 6.26% over the next twelve months.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Health Catalyst's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 46.8% in Q3.

Health Catalyst Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.46 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Health Catalyst burned through $16.2 million in Q3, increasing the cash burn by 130% year on year.

Health Catalyst Free Cash Flow

Health Catalyst has burned through $38.8 million in cash over the last twelve months, a negative 14.2% free cash flow margin. This low FCF margin is a result of Health Catalyst's need to still heavily invest in the business.

Key Takeaways from Health Catalyst's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Health Catalyst’s balance sheet, but we note that with a market capitalization of $375.9 million and more than $380.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see Health Catalyst outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see the pretty significant deterioration in gross margin and the revenue guidance for the next quarter slightly missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Health Catalyst. The company currently trades at $10.69 per share.

Is Now The Time?

When considering Health Catalyst, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Health Catalyst we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, the downside is that its gross margins show its business model is much less lucrative than the best software businesses and its growth is coming at a cost of significant cash burn.

Health Catalyst's price to sales ratio based on the next twelve months is 1.2x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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