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Health Catalyst (NASDAQ:HCAT) Q2 Sales Beat Estimates, Guides For Strong Sales Next Quarter


Full Report / August 05, 2021
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Healthcare software provider Health Catalyst (NASDAQ:HCAT) reported Q2 FY2021 results beating Wall St's expectations, with revenue up 37.8% year on year to $59.6 million. Health Catalyst made a GAAP loss of $35.8 million, down on its loss of $27.1 million, in the same quarter last year.

Health Catalyst (HCAT) Q2 FY2021 Highlights:

  • Revenue: $59.6 million vs analyst estimates of $56.7 million (5.09% beat)
  • EPS (non-GAAP): $0 vs analyst estimates of -$0.14 ($0.14 beat)
  • Revenue guidance for Q3 2021 is $60.9 million at the midpoint, above analyst estimates of $58.7 million
  • The company lifted revenue guidance for the full year, from $229.6 million to $238.2 million at the midpoint, a 3.74% increase
  • Free cash flow was negative -$8.13 million, compared to negative free cash flow of -$9.92 million in previous quarter
  • Gross Margin (GAAP): 49.5%, down from 51% previous quarter

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 $43.2 million, to $59.6 million.

Health Catalyst Total Revenue

This was a standout quarter for Health Catalyst, with the quarterly revenue up an absolutely stunning 37.8% year on year, which is above average for the company. On top of that, revenue increased $3.78 million quarter on quarter, a very strong improvement on the $2.56 million increase in Q1 2021, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 18.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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, licences, technical support and other necessary running expenses was at 49.5% in Q2.

Health Catalyst Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.49 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 Q2 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 market capitalisation of $2.49 billion and more than $262.7 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We enjoyed the positive outlook Health Catalyst provided for the next quarter’s revenue. And we were also excited to see it that it outperformed Wall St’s revenue expectations. On the other hand, it was less good to see the deterioration in gross margin. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 3.78% on the results and currently trades at $58.9 per share.

Is Now The Time?

Health Catalyst may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 10.0, 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, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.