2440

Health Catalyst (NASDAQ:HCAT) Q1 Sales Beat Estimates But Full Year Guidance Underwhelms


Full Report / June 28, 2022
Add to Watchlist

Healthcare software provider Health Catalyst (NASDAQ:HCAT) reported results ahead of analyst expectations in the Q1 FY2022 quarter, with revenue up 21.9% year on year to $68 million. However, guidance for the next quarter was less impressive, coming in at $69.5 million at the midpoint, being 2% below analyst estimates. Health Catalyst made a GAAP loss of $22.4 million, improving on its loss of $28.3 million, in the same quarter last year.

Health Catalyst (HCAT) Q1 FY2022 Highlights:

  • Revenue: $68 million vs analyst estimates of $66.0 million (3.13% beat)
  • EPS (non-GAAP): -$0.06 vs analyst estimates of -$0.11
  • Revenue guidance for Q2 2022 is $69.5 million at the midpoint, below analyst estimates of $70.9 million
  • The company reconfirmed revenue guidance for the full year, at $290.3 million at the midpoint
  • Free cash flow was negative $2.45 million, compared to negative free cash flow of $13.4 million in previous quarter
  • Gross Margin (GAAP): 50%, down from 51% 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 year, growing from quarterly revenue of $55.8 million, to $68 million.

Health Catalyst Total Revenue

This quarter, Health Catalyst's quarterly revenue was once again up a very solid 21.9% year on year. On top of that, revenue increased $3.37 million quarter on quarter, a solid improvement on the $2.97 million increase in Q4 2021. Happily, that's a slight re-acceleration of growth.

Guidance for the next quarter indicates Health Catalyst is expecting revenue to grow 16.5% year on year to $69.5 million, slowing down from the 37.8% 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 19.9% over the next twelve months.

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 50% in Q1.

Health Catalyst Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.50 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

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 $2.45 million in Q1,

Health Catalyst Free Cash Flow

Health Catalyst has burned through $32.7 million in cash over the last twelve months, a negative 12.8% 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 Q1 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 $698.4 million and more than $425.4 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were very impressed by the strong improvements in Health Catalyst’s gross margin this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 0.73% on the results and currently trades at $16.7 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 customer acquisition is less efficient than many comparable companies.

Health Catalyst's price to sales ratio based on the next twelve months is 2.3x, 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.

To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.