Health Catalyst Inc
For the period ended Jun 30, 2024. Filed Aug 8, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 8, 2024
HCAT$1.46-2.7%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-10.
0001636422-24-000075
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-08.
0001636422-24-000120
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 145 previous paragraphs and 179 current paragraphs.
95 unchanged; 46 reworded; 24 added; 2 removed; 2 previous and 14 current paragraphs rearranged.
Tables are not compared: 20 previous and 30 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (24)
Current report
Lumeon Acquisition
Current report
On August 1, 2024, we acquired Lumeon Ltd. (Lumeon), a digital health company dedicated to helping provider organizations mend broken care coordination processes through automated care orchestration, for preliminary consideration of approximately $37.5 million in cash and $2.5 million of our common stock, plus a potential recurring revenue-based earn-out of up to $25 million that, if achieved, would be paid solely in cash. Given the recent timing of the closing of this business combination, we are in the process of identifying and measuring the value of the assets acquired and liabilities assumed. We plan to disclose the preliminary purchase price allocation estimates and other related information in our Quarterly Report on Form 10-Q for the quarter ending September 30, 2024.
Current report
Carevive Acquisition
Current report
On May 24, 2024, we acquired Carevive Systems, Inc. (Carevive), a leading oncology-focused health technology company centered on understanding and improving the experience of patients with cancer. We accounted for the acquisition of Carevive as a business combination. Oncology providers and life science researchers use Carevive’s flagship platform and/or Carevive data in routine clinical practice for treatment care planning, clinical trial screening, care coordination, remote patient monitoring, and/or post-treatment care. The acquisition consideration transferred was$22.1 million and was comprised of net cash consideration of $18.6 million, shares of our common stock with a fair value of $2.6 million, and contingent consideration based on certain earn-out performance targets for Carevive during an earn-out period ending on June 30, 2025, with an initial fair value of $0.9 million. The purchase resulted in us acquiring 100% ownership in Carevive.
Current report
Total revenue was $75.9 million for the three months ended June 30, 2024, compared to $73.2 million for the three months ended June 30, 2023, an increase of $2.7 million, or 4%.
Current report
Research and development expenses were $13.9 million for the three months ended June 30, 2024, compared to $17.6 million for the three months ended June 30, 2023, a decrease of $3.7 million, or 21%. The decrease was primarily due to a $1.7 million decrease in salary and related personnel costs, a $1.4 million decrease in stock-based compensation, and a $0.6 million decrease contractor and outside service provider fees.
Current report
Depreciation and amortization expenses were essentially flat, and were $10.7 million for the three months ended June 30, 2024, compared to $10.7 million for the three months ended June 30, 2023.
Current report
Discussion of the Six Months Ended June 30, 2024 and 2023
Current report
Revenue
Current report
Total revenue was $150.6 million for the six months ended June 30, 2024, compared to $147.1 million for the six months ended June 30, 2023, an increase of $3.5 million, or 2%.
Current report
Cost of professional services revenue was essentially flat at $47.2 million for each of the six months ended June 30, 2024 and 2023. Notable changes in the cost of professional services revenue for the period include a $2.3 million increase in salary and related personnel cost, almost entirely offset by a $1.1 million decrease in stock-based compensation, a $0.9 million decrease in contractor and outside service provider fees, and a $0.3 million decrease in restructuring charges.
Current report
Operating expenses
Current report
Sales and marketing
Current report
Sales and marketing expenses were $31.8 million for the six months ended June 30, 2024, compared to $35.0 million for the six months ended June 30, 2023, a decrease of $3.2 million, or 9%. The decrease was primarily due to a $4.5 million decrease in stock-based compensation, a $2.1 million decrease in salary and related personnel costs, and a $0.2 million decrease in restructuring charges. These decreases were partially offset by a $1.9 million increase in our provision for expected credit losses and a $1.6 million increase in contractor and outside service provider fees.
Current report
Sales and marketing expense as a percentage of total revenue decreased from 24% in the six months ended June 30, 2023 to 21% in the six months ended June 30, 2024.
Current report
Research and development
Current report
Research and development expense as a percentage of revenue decreased from 24% in the six months ended June 30, 2023 to 19% in the six months ended June 30, 2024.
Current report
General and administrative
Current report
General and administrative expenses were $28.9 million for the six months ended June 30, 2024, compared to $47.5 million for the six months ended June 30, 2023, a decrease of $18.6 million, or 39%. The decrease was primarily due to a $21.3 million decrease in litigation costs compared to those that occurred in the prior-year period and are out of the ordinary course of business, a $0.8 million decrease in stock-based compensation, and a $0.4 million decrease in lease-related impairment charges. These decreases were partially offset by a $2.5 million increase in acquisition-related costs and a $1.6 increase in salary and related personnel costs.
Current report
Depreciation and amortization
Current report
Income tax provision
Current report
Credit Agreement
Current report
On July 16, 2024 (Closing Date), we entered into a credit agreement with Silver Point Finance, LLC as administrative agent and collateral agent, and the lenders from time to time party thereto (Credit Agreement). The Credit Agreement provides a five-year term loan facility in an aggregate principal amount of up to $225 million, consisting of an initial term loan in the aggregate principal amount of $125 million, which was funded on the Closing Date, and a delayed draw term loan facility in the aggregate principal amount of $100 million, which was undrawn on the Closing Date. We have the option to draw up to $40 million under the delayed draw facility within six months after the Closing Date and up to an additional $60 million under the delayed draw facility within eighteen months after the Closing Date, in each case, subject to satisfaction of certain conditions, including a minimum liquidity threshold and a maximum recurring revenue ratio. Borrowings under the Credit Agreement are expected to bear interest at a rate per annum equal to the secured overnight financing rate (SOFR) plus 6.5%. Commencing with the quarter ending on December 31, 2024, we are required to make quarterly principal payments in an amount equal to 0.25% of the aggregate original principal amount, and the final maturity date of the term loans is July 16, 2029.
Current report
The net proceeds from the initial term loan will be used, together with cash on hand, (i) to repurchase, repay and/or pay amounts of cash due upon conversion of any or all of our Notes at any time on or prior to the maturity of the Notes and (ii) for working capital and general corporate purposes. The proceeds from the delayed draw term loan facility, if any, will be used to fund our inorganic growth strategy through permitted acquisitions (including deferred purchase price or similar arrangements related thereto) and to pay fees, costs, and expenses in connection therewith.
Removed paragraphs (2)
Previous report
Total revenue was $74.7 million for the three months ended March 31, 2024, compared to $73.9 million for the three months ended March 31, 2023, an increase of $0.9 million, or 1%.
Previous report
(1)Not meaningful
Reworded paragraphs (46)
Previous wording
Highlights from the three months ended March 31, 2024 included:
Current wording
Highlights from the three and six months ended June 30, 2024 included:
Previous wording
•We recognized total revenue of $74.7 million and $73.9 million for the three months ended March 31, 2024 and 2023, respectively. The growth in revenue was primarily due to revenue from new clients and revenue expansion from existing clients, generally in Tech-enabled Managed Services.
Current wording
•We recognized total revenue of $75.9 million and $73.2 million for the three months ended June 30, 2024 and 2023, respectively, and $150.6 million and $147.1 million for the six months ended June 30, 2024, and 2023, respectively. The growth in revenue was primarily due to revenue from new clients and revenue expansion from existing clients, generally in Tech-enabled Managed Services.
Previous wording
•We incurred net losses of $20.6 million and $33.2 million for the three months ended March 31, 2024 and 2023, respectively.
Current wording
•We incurred net losses of $13.5 million and $32.6 million for the three months ended June 30, 2024 and 2023, respectively, and $34.1 million and $65.8 million for the six months ended June 30, 2024, and 2023, respectively.
Previous wording
•Our Adjusted EBITDA was $3.4 million and $4.2 million for the three months ended March 31, 2024 and 2023, respectively. See the section titled “Key Financial Metrics—Reconciliation of Non-GAAP Financial Measures” below for more information about Adjusted EBITDA, including the limitations of such measure and a reconciliation to net loss, the most directly comparable measure calculated in accordance with GAAP.
Current wording
•Our Adjusted EBITDA was $7.5 million and $3.5 million for the three months ended June 30, 2024 and 2023, respectively, and $10.9 million and $7.7 million for the six months ended June 30, 2024, and 2023, respectively. See the section titled “Key Financial Metrics—Reconciliation of Non-GAAP Financial Measures” below for more information about Adjusted EBITDA, including the limitations of such measure and a reconciliation to net loss, the most directly comparable measure calculated in accordance with GAAP.
Previous wording
The health system end market, in particular, continues to experience meaningful financial strain, in which it has realized significant increases in labor and supply costs without a commensurate increase in revenue, leading to a deterioration in operating margins across many of our clients and prospective clients. We saw a decrease in pipeline demand in 2023 relative to the period prior due to the onset of these macroeconomic factors in 2022, as well as some elevated realized and anticipated down-sell and churn levels, primarily for the parts of our Solution that do not offer near-term, financial return on investment (ROI), such as our clinically-focused technology offerings and our more traditional consulting Professional Services. We anticipate this dynamic to persist in the short term, although we have seen incremental improvements in recent months, including in the three month period ending March 31, 2024, and we are encouraged to see steadily improved operating margins for clients in our health system end market in recent quarters.
Current wording
The health system end market, in particular, has experienced meaningful financial strain over the last couple of years, in which it has realized significant increases in labor and supply costs without a commensurate increase in revenue, leading to a deterioration in operating margins across many of our clients and prospective clients. We saw a decrease in pipeline demand in 2023 relative to the period prior due to the onset of these macroeconomic factors in 2022, as well as some elevated realized and anticipated down-sell and churn levels, primarily for the parts of our Solution that do not offer near-term, financial return on investment (ROI), such as our clinically-focused technology offerings and our more traditional consulting Professional Services.
Previous wording
With respect to other near-term implications of the macroeconomic environment, we anticipate improvement in our bookings metrics relative to 2022 and 2023 for both dollar-based retention rate and net new DOS Subscription Client additions. We also anticipate our aggregate churn levels in 2024 to improve compared to 2023.
Current wording
In recent quarters, we have been encouraged to have seen incremental improvements, including in the six month period ending June 30, 2024, and we are encouraged to see steadily improving and stabilizing operating margins for clients and prospective clients in our health system end market. With respect to other near-term implications of the macroeconomic environment, we anticipate improvement in our 2024 bookings metrics relative to 2022 and 2023 for both net new DOS Subscription Client additions and Dollar-based Retention Rate. As it relates to Dollar-based Retention Rate, execution on Tech-enabled Managed Services bookings in the second half of 2024 will have a meaningful impact on our Dollar-based Retention Rate for the 2024 year. We also anticipate that a higher proportion of our net bookings will occur in the second half of 2024 as compared to our historical average, largely due to the anticipated timing of our larger pipeline opportunities.
Previous wording
Our 2023 net new DOS Subscription Clients had a lower average starting annual recurring revenue (ARR) as compared to historical levels. Our average subscription revenue for net new DOS Subscription Clients signed in the year ended December 31, 2023 (new 2023 DOS Subscription Clients), was toward the low end of the average expected range of $500,000 to $1,500,000, driven primarily by greater demand of stand-alone DOS module components, such as Healthcare.AI, which resulted in subscription revenue that is significantly lower than subscription revenue derived from a contract that includes access to all of the DOS platform components and analytic applications. This average ARR range is comprised of new 2023 DOS Subscription Clients with (i) subscription revenue in the expected average range or significantly above the expected average range driven by the size of the client organization and the bundle of technology and services included in their subscription and (ii) subscription revenue meaningfully below the low-end of the expected range driven by sales of stand-alone DOS module components, which provided greater deal certainty in a more challenging macroeconomic environment, and which we believe will provide an opportunity to expand our relationship with these DOS Subscription Clients in the future.
Current wording
Through June 30, 2024, our year to date net new DOS Subscription Client additions had a lower average starting annual recurring revenue (ARR) as compared to historical levels. We currently expect our average subscription revenue and non-recurring revenue for net new DOS Subscription Clients signed in the year ended December 31, 2024 (new 2024 DOS Subscription Clients) to be between an average range of $400,000 to $1,000,000, driven primarily by momentum in modular additions from Health Catalyst Ignite, such as Healthcare.AI and KPI Ninja’s Ninja Universe, Health Catalyst Ignite’s interoperability platform, which resulted in subscription revenue that is significantly lower than subscription revenue derived from a contract that includes access to all of the DOS platform components and analytic applications. Our modular pricing, which can be lower than our historical averages, has enabled a higher volume of opportunities. This average dollar range is comprised of new 2024 DOS Subscription Clients with (i) average revenue in the expected average range or significantly above the expected average range noted above, driven by the size of the client organization and the bundle of technology and services included in their subscription and (ii) average revenue meaningfully below the low-end of the expected range noted above, driven by sales of stand-alone Health Catalyst Ignite module components, which provided greater deal certainty in a more challenging macroeconomic environment, and which we believe will provide an opportunity to expand our relationship with these DOS Subscription Clients in the future, including through cross-selling efforts.
Previous wording
We have introduced Health Catalyst Ignite, which benefits from significant scalability and modularity. We expect to migrate existing DOS Subscription Clients to this new platform over the next two to three years. Over the medium-term, we expect the migration to Health Catalyst Ignite to result in a technology gross margin tailwind; however, we expect a near-term headwind as clients are being migrated. We anticipate new DOS Subscription Clients in 2024 will be deployed directly onto Health Catalyst Ignite.
Current wording
We have introduced Health Catalyst Ignite, our next-generation data and analytics platform, which benefits from significant scalability and modularity. We expect to migrate existing DOS Subscription Clients to this new platform over the next two to three years. Over the medium-term, we expect the migration to Health Catalyst Ignite to result in a technology gross margin tailwind; however, we expect a near-term headwind as clients are being migrated. We anticipate new DOS Subscription Clients in 2024 will be deployed directly onto Health Catalyst Ignite. Furthermore, given the modularity of Health Catalyst Ignite and migrations to its platform, we now primarily refer to DOS Subscription Clients as Platform Subscription Clients.
Previous wording
We benefit from a highly recurring revenue model, in which greater than 90% of our revenue is recurring in nature, and a high level of technology revenue predictability, especially within our DOS Subscription Clients whose contracts, when sold as a bundle with our analytics applications, often have built-in, contractual technology revenue escalators.
Current wording
We benefit from a highly recurring revenue model, in which greater than 90% of our revenue is recurring in nature, and a high level of technology revenue predictability, especially within our Platform Subscription Clients whose contracts, when sold as a bundle with our analytics applications, often have built-in, contractual technology revenue escalators.
Previous wording
As previously described, within our professional services segment, a subset of clients have reduced their spend, while in the technology segment, a subset of modular clients and smaller DOS platform clients have reduced their application and analytics spend.
Current wording
As previously described, within our professional services segment, a subset of clients have reduced their spend, while in the technology segment, a subset of modular clients and smaller platform clients have reduced their application and analytics spend. However, we anticipate our aggregate churn levels in 2024 to improve compared to 2023.
Previous wording
Given the improved bookings performance of our TEMS offering beginning in the second half of 2022 and extending through 2023, a higher proportion of our bookings in 2023 came from our professional services offering relative to 2022, as health systems looked for solutions to effectively address their near-term expense challenges. While this change in bookings mix will lead to lower professional services gross margin and Adjusted Professional Services Gross Margin and Total Adjusted Gross Margin in future years, we expect that we will achieve improvements in net loss and Adjusted EBITDA as a result of the minimal incremental operating expense required to support our TEMS growth. We continue to anticipate that our adjusted operating expenses as a percentage of revenue will trend lower, largely due to our restructuring efforts and meaningful continued operating leverage.
Current wording
Given the improved bookings performance of our TEMS offering in recent years, a higher proportion of our bookings in 2023 came from our professional services offering relative to 2022, as health systems looked for solutions to effectively address their near-term expense challenges. While this change in bookings mix will lead to lower professional services gross margin and Adjusted Professional Services Gross Margin and Total Adjusted Gross Margin in future years, we expect that we will achieve improvements in net loss and Adjusted EBITDA as a result of the minimal incremental operating expense required to support our TEMS growth. We continue to anticipate that our adjusted operating expenses as a percentage of revenue will trend lower, largely due to our restructuring efforts and meaningful continued operating leverage.
Previous wording
Technology gross margin remained constant at 53% for the three months ended March 31, 2024, and 2023, respectively. Adjusted Technology Gross Margin decreased from 70% for the three months ended March 31, 2023 to 68% for the three months ended March 31, 2024. This year-over-year result was mainly driven by continued costs associated with transitioning a portion of our client base to Azure-hosted environments as well as from costs associated with migrating a subset of DOS Subscription Clients to Health Catalyst Ignite, partially offset by existing clients paying higher technology access fees from contractual, built-in escalators, without a corresponding increase in hosting costs.
Current wording
Technology gross margin remained constant at 51% for the three months ended June 30, 2023 and 2024. Adjusted Technology Gross Margin decreased from 68% for the three months ended June 30, 2023 to 67% for the three months ended June 30, 2024. This year-over-year result was mainly driven by continued costs associated with transitioning a portion of our client base to Azure-hosted environments as well as from costs associated with migrating a subset of Platform Subscription Clients to Health Catalyst Ignite, partially offset by existing clients paying higher technology access fees from contractual, built-in escalators, without a corresponding increase in hosting costs.
Previous wording
Professional services gross margin increased from 12% for the three months ended March 31, 2023, to 16% for the three months ended March 31, 2024. Adjusted Professional Services Gross Margin increased from 20% for the three months ended March 31, 2023 to 22% for the three months ended March 31, 2024, primarily due to higher utilization rates and cost management efforts, driven in large part by the reduction in force that primarily occurred late in the fourth quarter of 2023. Our professional services are comprised of data and analytics services, domain expertise services, TEMS, and implementation services. The majority of our professional services revenue is generated from data and analytic services and domain expertise services, which are the highest gross margin professional services we provide. The delivery mix among all of our services in a given period can lead to fluctuations in our Adjusted Professional Services Gross Margin.
Current wording
Professional services gross margin increased from 9% for the three months ended June 30, 2023 to 15% for the three months ended June 30, 2024. Adjusted Professional Services Gross Margin increased from 17% for the three months ended June 30, 2023 to 20% for the three months ended June 30, 2024, primarily due to higher utilization rates and cost management efforts, driven in large part by the reduction in force that primarily occurred late in the fourth quarter of 2023 and early 2024. Our professional services are comprised of data and analytics services, domain expertise services, TEMS, and implementation services. The majority of our professional services revenue is generated from data and analytic services and domain expertise services, which are the highest gross margin professional services we provide. The delivery mix among all of our services in a given period can lead to fluctuations in our Adjusted Professional Services Gross Margin.
Previous wording
Total gross margin increased slightly from 38% for the three months ended March 31, 2023 to 39% for the three months ended March 31, 2024. Total Adjusted Gross Margin decreased slightly from 52% for the three months ended March 31, 2023 to 51% for the three months ended March 31, 2024. We expect total Adjusted Gross Margin to fluctuate and decline in the near term, primarily due to anticipated growth in professional services, including TEMS.
Current wording
Total gross margin increased slightly from 36% for the three months ended June 30, 2023 to 38% for the three months ended June 30, 2024. Total Adjusted Gross Margin remained consistent at 50% for the three months ended June 30, 2024 and 2023. We expect total Adjusted Gross Margin to fluctuate and decline in the near term, primarily due to anticipated growth in professional services, including TEMS.
Previous wording
(1)Acquisition-related costs, net include deferred retention expenses attributable to the ARMUS and KPI Ninja.
Current wording
(1)Acquisition-related costs, net include deferred retention expenses attributable to the ARMUS and KPI Ninja acquisitions.
Previous wording
We expect the workforce reductions that are part of a restructuring plan, authorized by our board of directors in the fourth quarter of 2023 and intended to optimize our cost structure and focus our investment of resources in key priority areas to align with strategic changes (2023 Restructuring Plan), including significant improvement in our Adjusted Professional Services Gross Margin in the first quarter of 2024 compared to the fourth quarter of 2023. However we still expect Adjusted Professional Services Gross Margin to fluctuate on a quarterly basis due to changes in the mix of services we provide, the amount of operational overhead required to deliver our services, and clients delaying or reducing services due to a potentially uncertain and challenging macroeconomic environment.
Current wording
In the fourth quarter of 2023, our board of directors approved workforce reductions as part of a restructuring plan intended to optimize our cost structure and focus our investment of resources in key priority areas to align with strategic changes (2023 Restructuring Plan). These reductions enabled significant improvement in our Adjusted Professional Services Gross Margin in the first two quarters of 2024 compared to the fourth quarter of 2023. However we still expect Adjusted Professional Services Gross Margin to fluctuate on a quarterly basis due to changes in the mix of services we provide, the amount of operational overhead required to deliver our services, and clients delaying or reducing services due to a potentially uncertain and challenging macroeconomic environment.
Previous wording
The following is a reconciliation of our Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP, for the three months ended March 31, 2024 and 2023.
Current wording
The following is a reconciliation of our Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP, for the three and six months ended June 30, 2024 and 2023.
Previous wording
•Impact of acquisitions. We have acquired multiple companies over the last few years, including Medicity in June 2018, Able Health in February 2020, Healthfinch in July 2020, Vitalware in September 2020, Twistle in July 2021, KPI Ninja in February 2022, ARMUS in April 2022, and ERS in October 2023. The historical and go-forward revenue growth profiles of these businesses may vary from our core DOS Subscription Clients, which can positively or negatively impact our overall growth rate. For example, Medicity clients have generated a lower dollar-based retention rate than DOS Subscription Clients and we expect declining revenue from Medicity clients in the foreseeable future. As we integrate the teams acquired via our recent acquisitions, we have also incurred integration-related costs and duplicative costs that could impact our operating cost profile in the near term.
Current wording
•Impact of acquisitions. We have acquired multiple companies over the last few years, including Medicity in June 2018, Able Health in February 2020, Healthfinch in July 2020, Vitalware in September 2020, Twistle in July 2021, KPI Ninja in February 2022, ARMUS in April 2022, ERS in October 2023, Carevive in May 2024, and Lumeon in August 2024. The historical and go-forward revenue growth profiles of these businesses may vary from our core DOS Subscription Clients, which can positively or negatively impact our overall growth rate. For example, Medicity clients have generated a lower dollar-based retention rate than DOS Subscription Clients and we expect declining revenue from Medicity clients in the foreseeable future. As we integrate the teams acquired via our recent acquisitions, we have also incurred integration-related costs and duplicative costs that could impact our operating cost profile in the near term.
Previous wording
•Changing revenue mix. Our technology and professional services offerings have materially different gross margin profiles. While our professional services offerings help our clients achieve measurable improvements and make them stickier, they have lower gross margins than our technology revenue. For the three months ended March 31, 2024, our technology revenue and professional services revenue represented 63% and 37% of total revenue, respectively. Changes in our percentage of revenue attributable to Technology and Professional Services would impact future gross margin and Adjusted Gross Margin.
Current wording
•Changing revenue mix. Our technology and professional services offerings have materially different gross margin profiles. While our professional services offerings help our clients achieve measurable improvements and make them stickier, they have lower gross margins than our technology revenue. For the six months ended June 30, 2024, our technology revenue and professional services revenue represented 63% and 37% of total revenue, respectively. Changes in our percentage of revenue attributable to Technology and Professional Services would impact future gross margin and Adjusted Gross Margin.
Previous wording
For example, we expect professional services revenue to become a higher percentage of total revenue as a result of increased demand for Tech-enabled Managed Services that tend to provide an immediate ROI for clients, including in the form of cost savings for the client. Furthermore, changes within the types of professional services we offer over time can have a material impact on our professional services margin and Adjusted Professional Services Gross Margin, impacting our future gross margin and Total Adjusted Gross Margin. See the section titled “Key Financial Metrics – Reconciliation of Non-GAAP Financial Measures” above for more information.
Current wording
Furthermore, changes within the types of professional services we offer over time can have a material impact on our professional services margin and Adjusted Professional Services Gross Margin, impacting our future gross margin and Total Adjusted Gross Margin. See the section titled “Key Financial Metrics – Reconciliation of Non-GAAP Financial Measures” above for more information.
Previous wording
We derive our revenue from sales of technology and professional services. For the three months ended March 31, 2024 and 2023, technology revenue represented 63% and 64% of total revenue, respectively, and professional services represented 37% and 36% of total revenue, respectively.
Current wording
We derive our revenue from sales of technology and professional services. For the three months ended June 30, 2024 and 2023, technology revenue represented 63% and 65% of total revenue, respectively, and professional services represented 37% and 35% of total revenue, respectively. For the six months ended June 30, 2024 and 2023, technology revenue represented 63% and 64% of total revenue, respectively, and professional services represented 37% and 36% of total revenue, respectively.
Previous wording
Technology revenue. Technology revenue primarily consists of subscription fees charged to clients for access to use our data platform and analytics applications. We provide clients access to our technology through either an all-access or limited-access, modular subscription. Most of our subscription contracts are cloud-based and generally have a three- or five-year term, of which many are terminable after one year upon 90 days’ notice. The vast majority of our DOS subscription contracts have built-in annual escalators for technology access fees. Also included in technology revenue is the maintenance and support we provide, which generally includes updates and support services.
Current wording
Technology revenue. Technology revenue primarily consists of subscription fees charged to clients for access to use our data platform and analytics applications. We provide clients access to our technology through either an all-access or limited-access, modular subscription. Most of our subscription contracts are cloud-based and generally have a three- or five-year term, of which many are terminable after one year upon 90 days’ notice. The majority of our DOS subscription contracts have built-in annual escalators for technology access fees. Also included in technology revenue is the maintenance and support we provide, which generally includes updates and support services.
Previous wording
Although we expect cost of technology revenue to increase in absolute dollars as we increase headcount, cloud computing, and hosting costs to accommodate growth, and as we continue to transition clients to third-party hosted data centers with Microsoft Azure and migrate clients to our next generation data platform, we anticipate cost of technology revenue as a percentage of technology revenue will generally decrease over the long term. We expect cost of technology revenue as a percentage of technology revenue to fluctuate and potentially increase in the near term, primarily due to additional costs associated with transitioning a small number of clients from on-premise deployments to Microsoft Azure-hosted environments and migrating clients to our next generation data platform.
Current wording
Although we expect cost of technology revenue to increase in absolute dollars as we increase headcount, cloud computing, and hosting costs to accommodate growth, and as we continue to transition clients to third-party hosted data centers with Microsoft Azure and migrate clients to Health Catalyst Ignite, our next generation data platform, we anticipate cost of technology revenue as a percentage of technology revenue will generally decrease over the long term. We expect cost of technology revenue as a percentage of technology revenue to fluctuate and potentially increase in the near term, primarily due to additional costs associated with transitioning a small number of clients from on-premise deployments to Microsoft Azure-hosted environments and migrating clients to Health Catalyst Ignite, our next generation data platform.
Previous wording
Technology revenue was $47.0 million, or 63% of total revenue, for the three months ended March 31, 2024, compared to $47.2 million, or 64% of total revenue, for the three months ended March 31, 2023. The slight technology revenue decrease was primarily from elevated churn levels, which were partially offset by growth from new DOS Subscription Clients, revenue from existing clients paying higher technology access fees from contractual, annual escalators, and new offerings of expanded support services.
Current wording
Technology revenue was $47.6 million, or 63% of total revenue, for the three months ended June 30, 2024, compared to $47.3 million, or 65% of total revenue, for the three months ended June 30, 2023. The slight technology revenue increase was primarily from growth from new Platform Subscription Clients, revenue from existing clients paying higher technology access fees from contractual, annual escalators, and new offerings of expanded support services, partially offset by elevated churn levels.
Previous wording
Professional services revenue was $27.8 million, or 37% of total revenue, for the three months ended March 31, 2024, compared to $26.7 million, or 36% of total revenue, for the three months ended March 31, 2023. The professional services revenue growth is primarily due to implementation, analytics, and other improvement services being provided to DOS Subscription Clients, which includes Tech-enabled Managed Services.
Current wording
Professional services revenue was $28.3 million, or 37% of total revenue, for the three months ended June 30, 2024, compared to $25.9 million, or 35% of total revenue, for the three months ended June 30, 2023. The professional services revenue growth is primarily due to implementation, analytics, and other improvement services being provided to Platform Subscription Clients, which includes Tech-enabled Managed Services.
Previous wording
Cost of professional services revenue was $23.2 million for the three months ended March 31, 2024, compared to $23.6 million for the three months ended March 31, 2023, a decrease of $0.4 million, or 2%. This decrease was primarily due to a $0.4 million decrease in stock-based compensation, a $0.3 million decrease in restructuring charges, and a $0.2 million decrease in contractor and outside service provider fees, partially offset by a $0.5 million increase in salary and related personnel costs.
Current wording
Cost of professional services revenue was $24.0 million for the three months ended June 30, 2024, compared to $23.6 million for the three months ended June 30, 2023, an increase of $0.4 million, or 2%. This increase was primarily due to a $1.8 million increase in salary and related personnel cost, partially offset by a $0.7 million decrease in contractor and outside service provider fees and a $0.6 million decrease in stock-based compensation.
Previous wording
Sales and marketing expenses were $19.1 million for the three months ended March 31, 2024, compared to $18.6 million for the three months ended March 31, 2023, an increase of $0.5 million, or 3%. The increase was primarily due to a $3.1 million increase in HAS event costs related to a change in the timing of the event and a $0.9 million increase in our provision for expected credit losses. These increases were partially offset by a $1.5 million decrease in stock-based compensation, a $1.0 million decrease in salary and related personnel costs, and a $0.7 million decrease in restructuring charges.
Current wording
Sales and marketing expenses were $12.7 million for the three months ended June 30, 2024, compared to $16.4 million for the three months ended June 30, 2023, a decrease of $3.7 million, or 22%. The decrease was primarily due to a $3.0 million decrease in stock-based compensation, a $0.6 million decrease in salary and related personnel costs, and a $0.2 million decrease in decrease in contractor and outside service provider fees. These decreases were partially offset by a $1.0 million increase in our provision for expected credit losses compared to the prior period.
Previous wording
Sales and marketing expense as a percentage of total revenue increased from 25% in the three months ended March 31, 2023 to 26% in the three months ended March 31, 2024.
Current wording
Sales and marketing expense as a percentage of total revenue decreased from 22% in the three months ended June 30, 2023 to 17% in the three months ended June 30, 2024.
Previous wording
Research and development expense as a percentage of revenue decreased from 23% in the three months ended March 31, 2023 to 20% in the three months ended March 31, 2024.
Current wording
Research and development expense as a percentage of revenue decreased from 24% in the three months ended June 30, 2023 to 18% in the three months ended June 30, 2024.
Previous wording
General and administrative expenses were $14.6 million for the three months ended March 31, 2024, compared to $23.8 million for the three months ended March 31, 2023, a decrease of $9.3 million, or 39%. The decrease was primarily due to a $11.7 million decrease in litigation costs that occurred in the prior-year period and are out of the ordinary course of business, partially offset by a $2.2 million increase in lease-related impairment charges and a $0.7 million increase in salary and related personnel costs.
Current wording
General and administrative expenses were $14.4 million for the three months ended June 30, 2024, compared to $23.7 million for the three months ended June 30, 2023, a decrease of $9.3 million, or 39%. The decrease was primarily due to a $9.6 million decrease in litigation costs compared to those that occurred in the prior-year period and are out of the ordinary course of business, a $2.6 million decrease in lease-related impairment charges that occurred in the prior-year period, and a $0.5 million decrease in stock-based compensation. These decreases were partially offset by a $2.2 million increase in acquisition-related costs and a $0.9 increase in salary and related personnel costs.
Previous wording
Interest and other income (expense), net increased $0.5 million, or 30%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This change is primarily due to an increase in interest income on our short-term investments of $0.6 million, primarily due to higher market interest rates, without a commensurate increase in interest expense on our Notes.
Current wording
Interest and other income (expense), net increased $0.3 million, or 13%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. This change is primarily due to an increase in interest income on our short-term investments of $0.3 million, primarily due to higher market interest rates, without a commensurate increase in interest expense on our Notes.
Previous wording
Cost of technology revenue, excluding depreciation and amortization, was $15.3 million for the three months ended March 31, 2024, compared to $14.7 million for the three months ended March 31, 2023, an increase of $0.6 million, or 4%. The increase was primarily due to a $1.1 million increase in cloud computing and hosting costs largely from the expanded use of Microsoft Azure to serve existing and new clients, and a $0.1 million increase in license and revenue share fees, partially offset by a $0.3 million decrease in salary and related personnel costs, and a $0.3 million decrease in contractor and outside service provider fees.
Current wording
Cost of technology revenue, excluding depreciation and amortization, was $31.4 million for the six months ended June 30, 2024, compared to $30.6 million for the six months ended June 30, 2023, an increase of $0.8 million, or 3%. The increase was primarily due to a $2.1 million increase in cloud computing and hosting costs largely from the expanded use of Microsoft Azure to serve existing and new clients, partially offset by a $0.6 million decrease in license and revenue share fees, a $0.3 million decrease in contractor and outside service provider fees, and a $0.4 million decrease in salary and related personnel costs, including stock-based compensation.
Previous wording
Research and development expenses were $14.9 million for the three months ended March 31, 2024, compared to $17.1 million for the three months ended March 31, 2023, a decrease of $2.2 million, or 13%. The decrease was primarily due to a $1.5 million decrease in contractor and outside service provider fees, and a $0.8 million decrease in stock-based compensation.
Current wording
Research and development expenses were $28.8 million for the six months ended June 30, 2024, compared to $34.7 million for the six months ended June 30, 2023, a decrease of $5.9 million, or 17%. The decrease was primarily due to a $2.2 million decrease in stock-based compensation, a $2.1 million decrease in contractor and outside service provider fees, and a $1.5 million decrease in salary and related personnel costs.
Previous wording
Depreciation and amortization expenses were $10.5 million for the three months ended March 31, 2024, compared to $11.0 million for the three months ended March 31, 2023, a decrease of $0.5 million, or 4%. This decrease was primarily due to certain acquired intangible assets from our business combinations becoming fully amortized.
Current wording
Depreciation and amortization expenses were $21.2 million for the six months ended June 30, 2024, compared to $21.7 million for the six months ended June 30, 2023, a decrease of $0.5 million, or 3%. This decrease was primarily due to certain acquired intangible assets from our business combinations becoming fully amortized.
Previous wording
As of March 31, 2024, we had cash, cash equivalents, and short-term investments of $327.8 million, which were held for working capital and other general corporate purposes, which may include acquisitions and strategic transactions. Our cash equivalents and short-term investments are comprised primarily of money market funds, U.S. treasury notes, commercial paper, corporate bonds, and U.S. agency securities.
Current wording
As of June 30, 2024, we had cash, cash equivalents, and short-term investments of $308.3 million, which were held for working capital and other general corporate purposes, which may include acquisitions and strategic transactions. Our cash equivalents and short-term investments are comprised primarily of money market funds, U.S. treasury notes, commercial paper, corporate bonds, and U.S. agency securities.
Previous wording
Since inception, we have financed our operations primarily from the proceeds we received through private sales of equity securities, payments received from clients under technology and professional services arrangements, borrowings under our loan and security agreements, our IPO, the Note Offering, and the Secondary Public Equity Offering. Our future capital requirements will depend on many factors, including our pace of new client growth and expanded client relationships, technology and professional services renewal activity, and the timing and extent of spend to support the expansion of sales, marketing, development, share repurchases, and acquisition-related activities. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.
Current wording
Since inception, we have financed our operations primarily from the proceeds we received through private sales of equity securities, payments received from clients under technology and professional services arrangements, borrowings under our loan and security agreements (including our Credit Agreement described below), our IPO, the Note Offering, and the Secondary Public Equity Offering. Our future capital requirements will depend on many factors, including our pace of new client growth and expanded client relationships, technology and professional services renewal activity, and the timing and extent of spend to support the expansion of sales, marketing, development, share repurchases, and acquisition-related activities. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.
Previous wording
During the third quarter of 2022, our board of directors authorized a share repurchase program to repurchase up to $40.0 million of our outstanding shares of common stock (Share Repurchase Plan). During the three months ended March 31, 2024, there were no shares repurchased. During the three months ended March 31, 2023, we repurchased and retired 145,027 shares of our common stock for $1.8 million at an average purchase price of $12.45 per share. The total remaining authorization for future shares of common stock repurchases under our Share Repurchase Plan is $29.8 million as of March 31, 2024.
Current wording
During the third quarter of 2022, our board of directors authorized a share repurchase program to repurchase up to $40.0 million of our outstanding shares of common stock (Share Repurchase Plan). During the six months ended June 30, 2024, there were no shares repurchased. During the six months ended June 30, 2024, we repurchased and retired 145,027 shares of our common stock for $1.8 million at an average purchase price of $12.45 per share. The total remaining authorization for future shares of common stock repurchases under our Share Repurchase Plan is $29.8 million as of June 30, 2024.
Previous wording
The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023:
Current wording
The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023:
Previous wording
For the three months ended March 31, 2024, net cash provided by operating activities was $10.3 million, which included a net loss of $20.6 million. Non-cash adjustments primarily consisted of $10.5 million in depreciation and amortization, $10.8 million in stock-based compensation, $2.4 million from the provision for expected credit losses, and $2.2 million from lease-related impairment charges, reduced by $2.0 million in net interest income from the amortization of discounts on our short-term investments.
Current wording
For the six months ended June 30, 2024, net cash provided by operating activities was $11.9 million, which included a net loss of $34.1 million. Non-cash adjustments primarily consisted of $21.2 million in depreciation and amortization, $19.8 million in stock-based compensation, $3.4 million from the provision for expected credit losses, and $2.2 million from lease-related impairment charges, reduced by $3.1 million in net interest income from the accretion of discounts on our short-term investments.
Previous wording
For the three months ended March 31, 2023, net cash used in operating activities was $5.6 million, which included a net loss of $33.2 million. Non-cash adjustments primarily consisted of $11.0 million in depreciation and amortization, $13.9 million in stock-based compensation, and $1.5 million from the provision for expected credit losses, reduced by $2.0 million in net interest income from the amortization of discounts on our short-term investments.
Current wording
For the six months ended June 30, 2023, net cash used in operating activities was $17.2 million, which included a net loss of $65.8 million. Non-cash adjustments primarily consisted of $21.7 million in depreciation and amortization, $28.5 million in stock-based compensation, and $2.7 million from lease-related impairment charges, reduced by $4.0 million in net interest income from the accretion of discounts on our short-term investments.
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Current report — wording carried from elsewhere
The following is a calculation of our gross profit and gross margin and a reconciliation of gross profit and gross margin to our Adjusted Gross Profit and Adjusted Gross Margin in total and for technology and professional services for the six months ended June 30, 2024 and 2023.
Current report — wording carried from elsewhere
Technology gross margin remained consistent at 52% for each of the six months ended June 30, 2024 and 2023. Adjusted Technology Gross Margin decreased from 69% for the six months ended June 30, 2023 to 68% for the six months ended June 30, 2024. This year-over-year result was mainly driven by continued costs associated with transitioning a portion of our client base to Azure-hosted environments as well as from costs associated with migrating a subset of Platform Subscription Clients to Health Catalyst Ignite, partially offset by existing clients paying higher technology access fees from contractual, built-in escalators, without a corresponding increase in hosting costs.
Current report — wording carried from elsewhere
We expect Adjusted Technology Gross Margin to fluctuate and potentially decline in the near term, primarily due to additional costs associated with the ongoing transition of a small number of clients from our managed data centers or on-premise to third-party hosted data centers with Microsoft Azure as well as the migration of a subset of clients to Health Catalyst Ignite. The potential decline is also attributable to a small subset of modular clients reducing their subscriptions to our software analytic applications, which tend to be higher margin offerings.
Current report — wording carried from elsewhere
Professional services gross margin increased from 10% for the six months ended June 30, 2023 to 16% for the six months ended June 30, 2024. Adjusted Professional Services Gross Margin increased from 19% for the six months ended June 30, 2023 to 21% for the six months ended June 30, 2024, primarily due to higher utilization rates and cost management efforts, driven in large part by the reduction in force that primarily occurred late in the fourth quarter of 2023 and early 2024. Our professional services are comprised of data and analytics services, domain expertise services, TEMS, and implementation services. The majority of our professional services revenue is generated from data and analytic services and domain expertise services, which are the highest gross margin professional services we provide. The delivery mix among all of our services in a given period can lead to fluctuations in our Adjusted Professional Services Gross Margin.
Current report — wording carried from elsewhere
Total gross margin increased slightly from 37% for the six months ended June 30, 2023 to 39% for the six months ended June 30, 2024. Total Adjusted Gross Margin remained consistent at 51% for the six months ended June 30, 2024 and 2023. We expect total Adjusted Gross Margin to fluctuate and decline in the near term, primarily due to anticipated growth in professional services, including TEMS.
Current report — wording carried from elsewhere
Cost of technology revenue, excluding depreciation and amortization, was $16.1 million for the three months ended June 30, 2024, compared to $15.9 million for the three months ended June 30, 2023, an increase of $0.2 million, or 1%. The increase was primarily due to a $1.0 million increase in cloud computing and hosting costs largely from the expanded use of Microsoft Azure to serve existing and new clients, partially offset by a $0.6 million decrease in license and revenue share fees and a $0.2 million decrease in salary and related personnel costs, including stock-based compensation.
Current report — wording carried from elsewhere
Technology revenue was $94.6 million, or 63% of total revenue, for the six months ended June 30, 2024, compared to $94.5 million, or 64% of total revenue, for the six months ended June 30, 2023. The slight technology revenue increase was primarily from growth from new Platform Subscription Clients, revenue from existing clients paying higher technology access fees from contractual, annual escalators, and new offerings of expanded support services, partially offset by elevated churn levels.
Current report — wording carried from elsewhere
Professional services revenue was $56.0 million, or 37% of total revenue, for the six months ended June 30, 2024, compared to $52.6 million, or 36% of total revenue, for the six months ended June 30, 2023. The professional services revenue growth is primarily due to implementation, analytics, and other improvement services being provided to Platform Subscription Clients, which includes Tech-enabled Managed Services.
Current report — wording carried from elsewhere
General and administrative expense as a percentage of revenue decreased from 32% in the six months ended June 30, 2023 to 19% in the six months ended June 30, 2024.
Current report — wording carried from elsewhere
Depreciation and amortization expense as a percentage of revenue decreased from 15% in the six months ended June 30, 2023 to 14% in the six months ended June 30, 2024.
Current report — wording carried from elsewhere
Interest and other income (expense), net increased $0.8 million, or 21%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. This change is primarily due to an increase in interest income on our short-term investments of $0.9 million, primarily due to higher market interest rates, without a commensurate increase in interest expense on our Notes.
Current report — wording carried from elsewhere
Our income tax provision consists of current and deferred taxes for U.S. federal, state, and foreign income taxes. As we have a full valuation allowance on our net deferred tax assets, our income tax provision typically consists primarily of minimal state and foreign income taxes, which is the case for the six months ended June 30, 2024 and 2023.
Current report — wording carried from elsewhere
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K, filed with the SEC on February 22, 2024 other than the new Credit Agreement entered subsequent to June 30, 2024 on July 16, 2024, as described in the Liquidity and Capital Resources section above and “Note 20—Subsequent Events.”
Current report — wording carried from elsewhere
Actual results could differ materially from these estimates under different assumptions or conditions. We will continue to actively monitor the impact of the recent inflationary pressures, market volatility caused by bank failures, the challenging macroeconomic environment in general, and other factors on our estimates, including our expected credit losses, goodwill impairment assessments, and the fair value and/or recoverability of other assets.
Rearranged previous paragraphs (2)
Previous report — wording carried elsewhere
Interest and other income (expense), net
Previous report — wording carried elsewhere
Interest and other income (expense), net