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Health Catalyst (NASDAQ:HCAT) Exceeds Q3 Expectations But Gross Margin Drops


Full Report / November 09, 2021
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Healthcare software provider Health Catalyst (NASDAQ:HCAT) beat analyst expectations in Q3 FY2021 quarter, with revenue up 30.8% year on year to $61.7 million. The company expects that next quarter's revenue would be around $62.9 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Health Catalyst made a GAAP loss of $40 million, down on its loss of $27.3 million, in the same quarter last year.

Health Catalyst (HCAT) Q3 FY2021 Highlights:

  • Revenue: $61.7 million vs analyst estimates of $60.8 million (1.5% beat)
  • EPS (non-GAAP): -$0.18 vs analyst estimates of -$0.22 (17.1% beat)
  • Revenue guidance for Q4 2021 is $62.9 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow was negative $8.77 million, compared to negative free cash flow of -$8.13 million in previous quarter
  • Gross Margin (GAAP): 46.4%, down from 48.3% 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.

The U.S. spends trillions every year on health care, but compared to other wealthy nations, the efficiency of the money spent often seems to be less than optimal. There is a growing pressure on lowering the costs while providing better care and utilizing healthcare data is positioned to play a key role in it.

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 year, growing from quarterly revenue of $47.1 million, to $61.7 million.

Health Catalyst Total Revenue

This was a standout quarter for Health Catalyst, with the quarterly revenue up a strong 30.8% year on year, which is above average for the company. But the growth did slow down compared to last quarter, as the revenue increased by just $2.11 million in Q3, compared to $3.78 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 20.6% over the next twelve months, although estimates are likely to change post earnings.

Profitability

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 46.4% 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.

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 $2.63 billion and more than $455.1 million in cash, the company has the capacity to continue to prioritize growth over profitability.

It was good to see Health Catalyst deliver strong revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $50.51 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. Unfortunately, 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 8.9x, 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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