HCAT - Health Catalyst Sees Growth In Tech-Enabled Managed Services

2023-09-15 13:40:37 ET

Summary

• Health Catalyst, Inc. provides a healthcare data platform for healthcare service providers.
• The company has shown promising growth in its tech-enabled managed services offering.
• However, Health Catalyst still has substantial operating losses and has not made significant progress towards operating breakeven.
• I'm Neutral [Hold] on Health Catalyst, Inc. for the near term.

A Quick Take On Health Catalyst

Health Catalyst, Inc. ( HCAT ) provides a healthcare data platform for healthcare service providers to obtain insights into their operations.

The firm has generated promising growth in its tech-enabled managed services offering.

However, HCAT still produces substantial operating losses and hasn’t shown material progress toward operating breakeven.

I’m Neutral [Hold] on Health Catalyst, Inc. until we see stronger evidence of meaningfully positive operating trends.

Health Catalyst Overview And Market

Established in 2008 in Salt Lake City, Utah, Health Catalyst offers a range of data and analytics services for the healthcare sector, such as a data platform, analytics software, and professional services expertise.

CEO Daniel Burton, who has been with the company since 2011 and co-founded HB Ventures, leads the executive management team.

The Health Catalyst platform enables healthcare service providers to effectively manage their data, derive actionable analytical insights, and produce tangible financial, clinical, and operational enhancements.

Health Catalyst’s DOS data platform facilitates data aggregation and analytics from a variety of sources.

To help clients achieve faster progress, Health Catalyst also employs a team specializing in analytics and domain knowledge.

The company also provides tech-enabled managed services, which have been growing substantially year-over-year.

A 2021 MarketsandMarkets research report said that the global healthcare analytics market was worth $21.1 billion in 2021 and was forecasted to reach $85.9 billion by 2027, expanding at a CAGR of 25.7% between 2022 and 2027.

Factors propelling this growth include government efforts to boost Electronic Health Record [EHR] adoption, increased venture capital investment, a growing need to lower healthcare costs while enhancing patient outcomes, and the emergence of big data in healthcare.

North America is predicted to be the fastest-growing region due to factors such as federal actions to reduce healthcare expenses, rising regulatory requirements, increased EHR adoption, and government initiatives that emphasize personalized medicine, population health management, and value-based reimbursements.

Major competitors that provide healthcare data and analytics solutions include:

• Epic Systems

• Cerner

• IBM

• SAS Institute

• Allscripts

• McKesson Corporation

• MedeAnalytics

• Oracle.

Health Catalyst’s Recent Financial Trends

• Total revenue by quarter has continued to grow; Operating income by quarter has remained heavily negative, but has improved in recent quarters.

• Gross profit margin by quarter has trended lower; Selling and G&A expenses as a percentage of total revenue by quarter have moved materially lower in recent quarters, a positive signal indicating increasing efficiencies in this regard.

• Earnings per share (Diluted) have trended higher in recent quarters, although still heavily in negative territory.

(All data in the above charts is GAAP.)

In the past 12 months, HCAT’s stock price has fallen 1.43% vs. that of the iShares Expanded Technology-Software ETF’s ( IGV ) rise of 27.74%:

For balance sheet results, the firm ended the quarter with $343.8 million in cash, equivalents and short-term investments and $227.3 million in total debt, all of which was long-term.

Over the trailing twelve months, free cash used was ($46.4 million), during which capital expenditures were $2.4 million. The company paid a hefty $64.6 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Health Catalyst

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

HCAT’s most recent unadjusted Rule of 40 calculation was negative (17.4%) as of Q2 2023’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of certain terms mentioned (or not) in the most recent management earnings conference call.

The relatively low frequency of negative terms mentioned indicates potentially positive sentiment, or at least the absence of significant negative sentiment.

Analysts questioned company leadership about its revenue guidance increase, while management responded that it was mainly due to faster implementation of existing contracts.

Management was also asked about gross margins in the ProServices segment. While there are various puts and takes there, leadership reiterated that these kinds of services are usually longer-term contracts with minimal incremental operating expenses.

Also, management commented on the growth of its "tech-enabled managed services," which offers clients "help with regards to financial pressures" and expects it to be a material growth driver "for many years."

Commentary On Health Catalyst

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management highlighted the "slight improvement" in recent months in its operating environment.

Management raised its full-year revenue guidance and expects to continue to produce 20% or greater revenue growth in the long term.

The leadership team expects to reduce R&D costs in 2024 as it sees the completion of data platform investments and further expense streamlining efforts.

The dollar-based net retention rate guidance for 2023 is 106% at the midpoint of the range, indicating moderately good sales and marketing efficiency.

Total revenue for Q2 2023 rose 3.7% year-over-year while gross profit margin dropped 5.1%.

Selling and G&A expenses as a percentage of revenue decreased by 12.0% YoY, a positive signal indicating increased efficiency of operations.

Operating loss was reduced by 23.2%, a meaningful improvement YoY.

The company's financial position is reasonably strong, with significant liquidity, so long-term debt but a material use of free cash in the past twelve months.

HCAT’s Rule of 40 performance has been quite poor, with low revenue growth combined with substantial losses.

Looking ahead, management expects full-year 2023 revenue to grow at 6.3% at the midpoint of the range.

If achieved, this would represent a material decline in revenue growth rate versus 2022’s growth rate of 14.3% over 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has risen only 8.7%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include continued adoption of the company's tech-enabled managed services offering.

However, the company still generates substantial operating losses and use of cash.

I’m Neutral [Hold] on HCAT until we see stronger evidence of a meaningful move toward positive operating trends.

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