Health Catalyst, Inc. (NASDAQ:HCAT) Q1 2024 Earnings Call Transcript

Health Catalyst, Inc. (NASDAQ:HCAT) Q1 2024 Earnings Call Transcript May 9, 2024

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Operator: Good afternoon, everyone, and welcome to the Health Catalyst First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Jack Knight, Vice President of Investor Relations. Please go ahead.

Jack Knight: Good afternoon, and welcome to Health Catalyst earnings conference call. For the first quarter of 2024, which ended on March 31, 2024. My name is Jack, and I am the Vice President of Investor Relations for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer; and Jason Alger, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today’s call is being recorded and a replay will be available following the conclusion of the call. During today’s call, we will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, regarding our future growth and our financial outlook for the second quarter and full year of 2024.

Our ability to attract new clients and retain and expand our relationships with existing clients, trends, strategies, the impact of the macroeconomic challenges, including the impact of inflation and the interest rate environment, the tight labor market, bookings, our pipeline conversion rates, the demand for deployment and development of our data and analytics platform, and the general anticipated performance of our business. These forward-looking statements are based on management’s current views and expectations as of today, and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may materially differ. Please refer to the risk factors in our Form 10-K for the full-year 2023 filed with the SEC on February 22, 2024, and our Form 10-Q for the first quarter of 2024 that will be filed with the SEC.

We will also refer to certain non-GAAP financial measures to provide additional information to investors. Non-GAAP financial information is presented for supplemental informational purposes only as limitations as an analytical tool and should not be considered in isolation, or as a substitute for financial information presented in accordance with GAAP. A reconciliation of non-GAAP financial measures for the first quarters of 2024 and 2023 to their most comparable GAAP measures is provided in our press release. However, we have not provided forward-looking guidance for professional services gross margin, the most directly comparable GAAP measure, to adjusted professional services gross margin, we will discuss later. Technology gross margin, the most directly comparable GAAP measure to our adjusted technology gross margin, we will discuss later.

Our net cash from operating activities, the most comparable GAAP measure to adjusted free cash flow, we will discuss later. And therefore, not provided related reconciliations of these non-GAAP measures to their most comparable GAAP measures because there are items that are not within our control or cannot be reasonably forecasted. With that, I will turn the call over to Dan. Dan?

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Q&A Session

Daniel Burton: Thank you, Jack, and thank you to everyone who’s joined us this afternoon. We are pleased to share our first-quarter 2024 financial performance, along with additional highlights from the quarter. I will begin today’s call with summary commentary on our first-quarter 2024 results. We are encouraged by our first-quarter 2024 financial results, including total revenue of $74.7 million, and adjusted EBITDA of $3.4 million, with these results above the midpoint of our most recent guidance on each metric. Additional financial highlights from the first quarter include our adjusted gross margin of 68% for technology, and 22% for professional services. Both of these metrics represent an improvement compared to Q4 2023.

Now, let me highlight some additional items from the quarter. You will recall from our previous earnings calls that we measure our company’s performance in the three strategic objective categories of improvement, growth, and scale. And we’ll discuss our quarterly results with you in each of these categories. The first category, improvement. It’s focused on evaluating our ability to enable our clients to realize massive, measurable improvements, while also maintaining industry-leading client and team member engagement. Let me begin by sharing a couple of examples of improvements from recently published success stories. First, many healthcare organizations grapple with the challenges of labor-intensive chart abstraction and registry submission.

These processes are costly and time consuming, and demand expertise and clinical and electronic health record systems. Compounded by the industry’s imperative to reduce expenses, these burdens underscore the need for innovative solutions. Our tech-enabled managed services solution for chart abstraction leverages our technology and expertise, inclusive of generative AI and process improvement methodologies to establish substantially more efficient abstraction. Our solution enables improved timeliness, accuracy, and quality of submission, all at a meaningfully lower cost. Data exists in structured and unstructured format within EHRs, requiring clinical interpretation, imposing obstacles to chart abstraction automation. Our chart abstraction generative AI solution extracts pertinent evidence from EHR notes and note segments, learns from previously completed registry data, and recommend answers, and then presents relevant patient data to abstractors in their abstraction and validation workflows.

This significantly streamlines the abstraction process by automating the laborious task of finding, interpreting, and gathering data. Additionally, its adaptive learning capabilities continually refine results through user interactions, enhancing accuracy over time. Our initial findings have demonstrated a 24% reduction in extraction time, accompanied by heightened confidence in responses due to the inclusion of the evidence within the chart abstraction generative AI platform. As a result, we are driving chart abstraction efficiencies with significant accuracy and quality, fulfilling our commitment to deliver cost savings to clients, while reducing Health Catalyst labor costs. Next year, UnityPoint Health was presented with the Flywheel Award at our 2024 Healthcare Analytics Summit for its outstanding achievements in transforming healthcare and enhancing the lives of those it serves.

UnityPoint recognize the need for advanced analytics to support clinical decision making, while addressing population health priorities and effectively managing costs. Their leadership’s goal was to gain a deeper understanding of their extensive collection of clinical and claims data. UnityPoint sought consistent data definitions for measuring outcomes and care quality that it was lacking in its current state. This limitation hindered their ability to leverage valuable data insights and analytics to succeed in risk-based contracts like shared savings agreements. To address these challenges, the Iowa-based health system network adopted the Health Catalyst data and analytics platform and a suite of analytics applications to establish a single source of truth across various systems.

This enabled the conversion of raw data into insights that were consistent and accessible across all settings, providing actionable information on patient characteristics and healthcare utilization patterns. They also built a better predictive model to tackle population health and financial trend. As a result, UnityPoint has been recognized for consistently delivering significant improvements throughout its organization and accomplishing considerable milestones, including over $100 million in cost savings and revenue enhancements over the past several years. These accomplishments encompass dozens of improvement initiatives such as reducing healthcare costs by $41 million through shorter hospital stays, and saving $32 million in healthcare expenditures in a single year through improved care management practices.

Additionally, they achieved a 39% relative decrease in emergency department visits and a 54% relative decrease in hospital admissions. Finally, in addition to UnityPoint receiving our Flywheel Award, Health Catalyst’s publicly recognized seven other recipients of the catalyst awards and annual awards program, recognizing hospitals and health systems that have led the way in data-informed healthcare improvement. These other winners included Baylor Scott & White Health, Providence, The Queen’s Health System, WakeMed Health & Hospitals, Carle Health, Community Health Network, and INTEGRIS Health. Also in the improvement category, we have been fortunate to receive an additional recent external recognition related to our team member engagement. For the seventh year in a row, the Women Tech Council named Health Catalyst to its annual shatter list, the council’s list of companies with active programs leading and accelerating progress towards breaking the glass ceiling for women in technology.

Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. In this category, let me first share that at the end of February, we hosted our 10th Healthcare Analytics Summit. We were excited to host nearly 1,000 attendees representing more than 200 organizations, including participation from many existing and prospective clients, providing us with meaningful opportunities to deepen these relationships. Our growth organization hosted 115 scheduled face-to-face client and prospective client meetings, in addition to a far greater number of impromptu ad hoc need. Other Health Catalyst’s senior leaders and I personally attended most of these face-to-face client and prospective client meetings during the summit.

And we feel encouraged by the momentum we are seeing in our pipeline following this year’s conference. In addition, there were more than 100 presenters between keynote presentations, breakout sessions showcases at our user conference, and over 50% of these presentations were from clients. Lastly, based on the post-summit survey, overall satisfaction from attendees was 98%, reinforcing and confirming the value that attendees realize from the summit. One key discussion topic during our Healthcare Analytics Summit related to our next-generation data analytics platform. As a reminder, we’ve made a meaningful investment in the next generation of our data and analytics platform, allowing for significant increases in its scalability and modularity by integrating cross-industry technology from partners such as Databricks, Microsoft, and Snowflake, while also benefiting from Health Catalyst-differentiated capabilities in areas of healthcare-specific data models and data content, healthcare-specific analytics, AI, and data science, and healthcare improvement expertise.

We are excited to announce this next-generation data analytics platform will be branded as Health Catalyst Ignite. The initial deployments of Ignite are going as planned, and we anticipate that all new client deployments will be on this platform. Additionally, we expect the vast majority of our current data platform subscription plans that utilize DOS, will be migrated to help catalyst Ignite over the next two to three years. Following our Healthcare Analytics Summit, we are encouraged to see strong demand from existing clients and new clients to move to Ignite. Next, related to our current growth operating environment. Consistent with what we have shared recently, we are encouraged to see health system operating margins steadily improving in recent months, specifically compared to 2022 and most of 2023.

We anticipate this will be a tailwind for our bookings metrics in 2024 and for our top line growth in 2025. Related to our full-year 2024 bookings expectations, let me share some additional commentary, which is consistent with what we shared a few months ago on our Q4 2023 earnings call. Our pipeline continues to support our 2024 bookings expectations, inclusive of a dollar-based retention rate between 104% and 110%, and net new DOS subscription client additions in the mid-teens. Our pipeline continues to grow, which gives us additional confidence in achieving our 2024 bookings expectations. As a reminder, we typically experience seasonality in our bookings activity, with Q2 and Q4 normally representing the majority of our sales, aligned with healthcare organizations fiscal years and budget cycles.

Next, I am excited to announce a meaningful expansion with one of our international clients. We are pleased to have expanded our relationship with Saudi German Health to elevate the health outcomes, and Bait Al Batterjee Medical Company hospitals in the United Arab Emirates. Saudi German Health is a leading private healthcare provider across the Middle East and North Africa, with 18 medical facilities caring for more than 2.5 million patients. Health Catalyst first announced our partnership with Saudi German in 2020, when we entered a multi-year strategic partnership to service nine Saudi German hospital’s in the Kingdom of Saudi Arabia. Bait Al Batterjee Medical Company implemented Health Catalyst’s data and analytics platform, as well as power costing in Twistle patient engagement along with our professional services expertise.

This expansion will equip the hospital’s staff and executives with accurate and actionable activity-based costing data. We are excited to deepen this strategic relationship. Lastly, as it relates to growth, let me share a few comments related to our M&A strategy. We continue to carefully assess potential acquisitions within our pipeline and are mindful of current market dynamics related to valuation. We will continue to be disciplined in our M&A evaluation process, requiring acquisitions to be both strategic and financially compelling for Health Catalyst. We will aim to be thoughtful about tuck-in acquisitions. And similar to last few years, we anticipate that any M&A would most likely come at the application’s layer or intends enablement. I’d also note that we consider M&A as one tool in a broader capital allocation toolbox.

We are fortunate to have a strong balance sheet, and we regularly assess all capital allocation alternatives, always with an eye towards creating long-term shareholder value. With that, let me turn the call over to Jason. Jason?

Jason Alger: Thank you, Dan. Before diving into our quarterly financial results, I want to echo what Dan shared and say that I am pleased with our first-quarter performance. I will now comment on our strategic objective category of scale. For the first quarter of 2024, we generated $74.7 million in total revenue. This total represents a slight outperformance relative to the midpoint of our quarterly guidance, and it is an increase of 1% year over year. Technology revenue for the first quarter of 2024 was $47 million, roughly flat compared to Q1 2023. Professional services revenue for Q1 2024 was $27.8 million, representing a 4% increase relative to the same period last year. This year-over-year performance was primarily due to revenue recognition ramping from the tech-enabled managed services contracts that were signed in the second half of 2023, partially offset by some down selling from our higher margin consulting services.

For the first-quarter 2024, total adjusted gross margin was 51%, representing a decrease of approximately 70 basis points year over year. In the technology segment, our Q1 2024 adjusted technology gross margin was 68%, a decrease of approximately 140 basis points relative to the same period last year. This year-over-year performance was expected, and mainly driven by costs associated with migrating a subset of our client base to Health Catalyst Ignite. Our next-generation, multi-tenant Snowflake and Databricks enabled data and analytics platform environment. In the professional services segment, our Q1 2024 adjusted professional services gross margin was 22%, representing an increase of approximately 190 basis points year over year, and an increase of approximately 1,040 basis points relative to Q4 2023.

This quarterly performance was ahead of the expectations we shared on our last earnings call, mainly driven by our recent reduction in force that primarily occurred late in the fourth quarter of 2023. In Q1 of 2024, adjusted total operating expenses were $59 million adjusted EBITDA in Q1 2024 was $3.4 million, exceeding the midpoint of our guidance. Our adjusted net income per share in Q1 2024 was $0.05. The weighted average number of shares used in calculating adjusted basic net income per share in Q1 was approximately 58.6 million shares. Turning to the balance sheet, we are pleased with the strength of our financial position, which provides us with meaningful financial and strategic flexibility. We ended Q1 2024 with $327.8 million of cash, cash equivalents and short-term investments, up $10.1 million compared to year end 2023.

In terms of liabilities, the face value of our outstanding convertible notes is a principal amount of $230 million due in April 2025, and the net carrying amount of the liability component is currently $228.4 million. Along with our advisors, we consistently evaluate our optimal capital structure. We have more than sufficient cash to pay off the convertible notes, but are also confident that we have a range of options available to refinance our upcoming convert maturity, which we intend to address well in advance of the stated maturity. As it relates to our financial guidance for the second quarter of 2024, we expect total revenue between $73.5 million and $76.5 million, and adjusted EBITDA between $5 million and $7 million. And for the full-year 2024, we continue to expect total revenue between $304 million and $312 million, and adjusted EBITDA between $24 million and $26 million.

Now let me provide a few additional details related to our 2024 guidance. First, as it relates to our Q2 2024 expectations, we expect that our technologies segment revenue will be relatively flat quarter over quarter. For our professional services segment, we anticipate that our Q2 revenue will be roughly flat sequentially. Next, in terms of our adjusted gross margin, we continue to expect that our adjusted technology gross margin will be roughly flat to slightly down quarter over quarter. In the professional services segment, we anticipate our Q2 2024 adjusted gross margin will be slightly down compared to Q1 2024. However, I expect it to still be several points higher than our professional services adjusted gross margin in 2023. Lastly, we anticipate that our operating expenses will be down in Q2 2024 relative to Q1 2024, mainly the result of the roll-off of expenses related to our Healthcare Analytics Summit.

Next, let me share a few additional details related to our full-year 2024 guidance, which is consistent with what we shared on our Q4 2023 earnings call. We continue to anticipate that our year-over-year total revenue growth will be lower in the first half and will ramp in the second half of 2024 as we benefit from in-year 2024 bookings, naturally translating into second half revenue. Next, in terms of our adjusted gross margin, we continue to expect adjusted technology gross margin will be in the high-60s this year. This adjusted technology gross margin will benefit from built-in technology gross margin expansion driven mainly by contractual escalators. However, we anticipate that this will be mostly offset by the costs associated with migrating additional clients to Ignite from our legacy, DOS platform.

That said, over the longer term, we expect the migration to Ignite to drive technology gross margin expansion. Additionally, we continue to anticipate our adjusted professional services gross margin will be in the high-teens for 2024. This will be primarily driven by the mix of professional services, which we anticipate will be comprised of a larger proportion of tech-enabled managed services, which start out at a low gross margin before ramping meaningfully over time. Next, we expect to continue to see material operating leverage. For instance, we expect R&D expense to be lower in absolute dollars relative to 2023, as we ramp down the larger upfront investment made in Health Catalyst Ignite, our next-generation data and analytics platform.

We also anticipate SG&A will decline as a percentage of revenue. Consistent with what we shared on our most recent earnings call, we anticipate we will see a reduction in our stock-based compensation in 2024 as a percentage of revenue relative to 2023 by approximately 350 to 450 basis points, while also noting that this estimate could be impacted by items such as M&A activity and fluctuation in the share price. Lastly, we anticipate that our adjusted free cash flow will be approximately breakeven in 2024. With that, I will conclude my prepared remarks. Dan?

Daniel Burton: Thanks, Jason. In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members, with their dedication and contributions to these results and this progress, as well as express my optimism for the future. And with that, I will turn the call back to the operator for questions.

Operator: [Operator Instructions]. We will first go this afternoon to Jared Haase of William Blair.

Jared Haase: Yeah. Thanks, guys, for taking the questions. This is Jared on for Ryan Daniels. Dan, maybe just since you mentioned in the prepared remarks M&A, I’ll ask one around that. I’m curious could you just maybe remind us any particular product areas or value propositions that might make sense for you guys to look — to do a deal around just the deal in terms of that build versus buy question? And then I guess also related to that, could you kind of run through what you typically look for or how we should think about that type of deal size or financial profile?

Daniel Burton: Yeah. Absolutely, Jared. So when we think about M&A, first, as we mentioned in the prepared remarks, we look for a really strong strategic fit and specifically, we are focused in those five key areas. There’s two horizontal areas around the data and analytics platform, and then the measures and registries capability that are more horizontal in nature. And so we focus on ensuring that we’re strategically really strong there. Most of our data analytics platform investments and improvements come through R&D, and less about the about the M&A opportunities. But I would say in the measures and registry space, in the three use case are areas of focus for us. Those are areas where we’re conscious of the opportunities that might exist in buy versus partner versus build specific spaces.