The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results could differ materially from those forward-looking statements below. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled "Risk Factors" and "Special Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K. A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is presented below. A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 is included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our prior year Form 10-K filed onMarch 1, 2022 . Overview We are a leading provider of data and analytics technology and services to healthcare organizations. Our Solution comprises our cloud-based data platforms, software analytics applications, and professional services expertise. Our clients, which are primarily healthcare providers, use our Solution to manage their data, derive analytical insights to operate their organization, and produce measurable clinical, financial, and operational improvements. We envision a future where all healthcare decisions are data informed.Health Catalyst was founded in 2008 by healthcare analytics industry pioneers. Our founders and team developed the initial version of our Solution, consisting of an early version of our data platform, select analytics accelerators, and professional services expertise. From the beginning, our Solution has been focused on enabling our mission: to be the catalyst for massive, measurable, data-informed healthcare improvement. We currently employ more than 1,200 team members.
Highlights from the years ended
•For the years endedDecember 31, 2022 , 2021, and 2020, our total revenue was$276.2 million ,$241.9 million , and$188.8 million , respectively. The growth in revenue was primarily due to revenue from new clients, including clients of our recent acquired entities, and existing clients paying higher technology access fees from contractual, annual escalators.
•For the years ended
of
•For the years ended
See "Reconciliation of Non-GAAP Financial Measures" below for more information
about this financial measure, including the limitations of such measure and a
reconciliation to the most directly comparable measure calculated in accordance
with GAAP. See "Key Factors Affecting Our Performance" for more information
about important opportunities and challenges related to our business.
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Challenging Macroeconomic Environment
Recent macroeconomic challenges (including high levels of inflation and high interest rates), the tight labor market, and the lingering effects of the COVID-19 pandemic continue to adversely affect workforces, organizations, governments, clients, economies, and financial markets globally. These factors have disrupted the normal operations of many businesses, including our business. These factors have also placed the national healthcare system under significant operational and budgetary strain, and will likely continue to do so in the near term. The health system end market, in particular, is experiencing 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 anticipate this dynamic to persist for at least the next few quarters. Though we continue to have a robust pipeline, particularly in those parts of our Solution that offer near-term, measurable cost savings, many healthcare organizations have delayed near-term purchasing decisions and reduced their costs as they reevaluate budgets in response to their financial situations. This dynamic elongated our sales cycle, negatively impacted our bookings achievement, resulted in some clients reducing their contracted fees for certain elements of our Solution, and led to lower than anticipated Dollar-Based Retention achievement in 2022. Although we have seen a decline in our sales pipeline with respect to parts of our Solution that do not offer a near-term, measurable return on investment (ROI), such as our clinically-focused technology offerings and our more traditional professional services consulting, we believe demand for other parts of our Solution that enable health systems to achieve near-term financial improvements will continue to grow, including demand for Tech-enabled Managed Services, our financial and operational analytic applications, and components of ourPopulation Health technology suite. These parts of our Solution largely drove more positive bookings results in the second half of 2022 as compared to the first half of 2022, and we anticipate they will continue to drive improvement with respect to our DOS Subscription Clients and Dollar-Based Retention in the near term. 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 typically have built-in, contractual technology revenue escalators. During 2022, however, in a few instances, we experienced clients trimming back their near-term spend with us in an effort to meet short-term budget requirements. This included the loss of a large enterprise DOS Subscription Client. Our historical gross client retention has typically been very high, especially amongst our enterprise DOS client base, and we believe the loss of this large enterprise DOS client was a client-specific event. Within our professional services segment, a subset of clients have reduced the number of FTEs engaged in their initiatives, while in the technology segment, a small subset of modular clients and smaller DOS platform clients have lowered their application and analytics spend. Given the improved bookings performance of our Tech-enabled Managed Services offering in 2022 and the continued growth in our pipeline from that offering, we expect a higher proportion of our revenue growth in 2023 will likely come from our professional services offering, as health systems look for solutions to effectively address their near-term labor expense challenges. While this expected change in revenue mix will likely lead to lower Adjusted Professional Services Gross Margin and Total Adjusted Gross Margin in 2023 as compared to prior years, we expect that we will continue to achieve improvements in our Adjusted EBITDA as a result of the minimal incremental operating expense required to support our Tech-enabled Managed Services growth. We proactively responded to the challenging macroeconomic environment with a strategic operating plan that emphasizes our offerings and go-to-market approach on the areas where we have the most competitive differentiation and where clients are most likely to achieve measurable financial and operational ROI both in the near term and over time. We believe this focus will enable us to move forward in a position of continued competitive and financial strength. We will continue to refine this strategic operating plan and are continuing to make several investments in research and development, primarily in enhancing the capabilities within our DOS platform, in order to maintain our position as a market-leading data platform over the long term. 58
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Our Business Model
We offer our Solution to a variety of healthcare organizations, primarily inthe United States , including academic medical centers, integrated delivery networks, community hospitals, large physician practices, ACOs, health information exchanges, health insurers, and other risk-bearing entities. We categorize our client count into two primary categories: DOS Subscription Clients and Other Clients. DOS Subscription Clients are defined as clients who directly or indirectly access our DOS platform via a technology subscription contract. Indirect access to the DOS platform may include DOS module components such as Healthcare.AI, Pop Analyzer, IDEA, and other DOS platform components. See "Key Business Metrics" for more information about our DOS Subscription Clients. Other Clients generally include DOS non-subscription clients and other clients from historical acquisitions. As ofDecember 31, 2022 , 2021, and 2020, we had 98, 90, and 74 DOS Subscription Clients with active subscriptions, respectively. As ofDecember 31, 2022 , we served over 425 Other Clients compared to over 350 as ofDecember 31, 2021 . The increase in Other Clients from 2021 to 2022 was primarily due to our acquisitions of ARMUS and KPI Ninja. We derive substantially all of our revenue through subscriptions for use of our technology and professional services on a recurring basis. In 2022, greater than 90% of our total revenue was recurring in nature. Clients pay for our technology primarily on a subscription basis for our entire technology suite or for pieces of our technology (e.g., DOS-only or modular portions of DOS, which we have sometimes referred to as DOS Lite). We generally provide access to our technology and deliver professional services to clients on a recurring basis, with our technology invoiced upfront annually or quarterly and our professional services invoiced monthly. Most of our technology and professional services contracts with DOS Subscription Clients have a three or five-year term, of which many are terminable after one year upon 90 days' notice. As we increase the use cases we address at a given client, we have the opportunity to upsell incremental technology and services. We have demonstrated an ability to upsell technology and services to our client base over time as evidenced by a Dollar-based Retention Rate of 100%, 112%, and 102% for the years endedDecember 31, 2022 , 2021, and 2020, respectively. The primary costs incurred to deliver our technology are hosting fees and headcount-related costs associated with our cloud services and support teams. Hosting fees are related to providing our technology through a cloud-based environment hosted primarily by Microsoft Azure. However, we also have deployed DOS on-premise to a small number of clients. Over time, we plan to continue to migrate our on-premise clients to Azure-hosted environments, increasing our technology cost of revenue. We have experienced and expect to continue to experience operational inefficiencies associated with managing multiple hosting providers, resulting in a headwind against Adjusted Technology Gross Margin. Additionally, we are in the early phases of migrating our DOS platform client base to a single-instance, multi-tenant data platform architecture that includes enhanced elastic compute capabilities supported by Snowflake andDatabricks database technologies. We expect that these investments in our DOS platform will provide additional capabilities for our clients as well as improve our ability to drive cost efficiencies in our hosting and support costs per client over time. However, in the medium-term, we will incur some migration costs associated with deploying the updated architecture across DOS platform clients, resulting in a headwind for our Technology Gross Margin. The primary costs incurred to deliver our professional services are the salaries, benefits, and other headcount-related costs of our team members. We delineate our sales organization by new client acquisition and existing client retention and expansion. Selling efforts to new clients vary. Many of our new clients engage with us broadly for multiple use cases, requiring buy-in during the sales cycle across the C-suite. Alternatively, in some instances, we engage with a client in a single-use case. After we demonstrate measurable improvements, we work with our clients to expand the utilization of our Solution to other use cases or enterprise-wide. The average sales cycle for a new DOS Subscription Client is estimated to be approximately one year, but that timeline can vary materially. Because of our vertical focus on the healthcare industry, we believe our sales and marketing resources can be deployed more efficiently than at horizontally-focused companies that provide technology and services to multiple industries. Additionally, with our increased focus on driving expansion within our existing client base through our Tech-enabled Managed Services offering, we believe that our sales and marketing infrastructure is positioned well to generate meaningful leverage and growth within our services offerings without the need for the same level of incremental investment as in prior years. This operating leverage primarily stems from the fact that we already have an existing relationship with the client, inclusive of having invested in client success initiatives and having provided account management services to the client since the beginning of our contractual relationship. Over the past few years, we have invested in growth infrastructure by adding to our sales operations and marketing teams, which are built to help us scale over the long term. We have demonstrated a consistent track record of innovation through research and development over time as evidenced by our new product features and new product offerings. This innovation is driven by feedback we glean from our clients, professional services teams, and the market generally. Our investments in product development have been focused on increasing the capabilities of our Solution and expanding the number of use cases we address for our clients. 59 -------------------------------------------------------------------------------- Table of Contents Key Business Metrics We regularly review a number of metrics, including the following key financial metrics, to manage our business and evaluate our operating performance compared to that of other companies in our industry: Year Ended December 31, 2022 2021 2020 (in thousands, except percentages) Total revenue$ 276,236 $ 241,926 $ 188,845 Adjusted Technology Gross Profit$ 122,284 $ 102,326 $ 75,666 Adjusted Technology Gross Margin 69 % 69 % 68 %
Adjusted Professional Services Gross Profit
Adjusted Professional Services Gross Margin
24 % 27 % 25 % Total Adjusted Gross Profit$ 145,849 $ 127,870 $ 95,024 Total Adjusted Gross Margin 53 % 53 % 50 % Adjusted EBITDA$ (2,487) $ (11,248) $ (21,287)
We monitor the key metrics set forth in the preceding table to help us evaluate
trends, establish budgets, measure the effectiveness and efficiency of our
operations, and determine team member incentives. We discuss Adjusted Gross
Profit, Adjusted Gross Margin, and Adjusted EBITDA in more detail below.
Adjusted gross profit and adjusted gross margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of revenue, excluding depreciation and amortization, adding back stock-based compensation, acquisition-related costs, net, and restructuring costs as applicable. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other non-recurring operating expenses. We present both of these measures for our technology and professional services business. We believe these non-GAAP measures are useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain items that may vary from company to company for reasons unrelated to overall profitability. See above for information regarding the limitations of using our Adjusted Gross Profit and Adjusted Gross Margin as financial measures and for a reconciliation of revenue to our Adjusted Gross Profit, the most directly comparable financial measure calculated in accordance with GAAP.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss
adjusted for (i) interest and other (income) expense, net, (ii) loss on
extinguishment of debt, (iii) income tax provision (benefit), (iv) depreciation
and amortization, (v) stock-based compensation, (vi) acquisition-related costs,
net, including the change in fair value of contingent consideration liabilities
for potential earn-out payments, (vii) restructuring costs, and (viii)
non-recurring lease-related charges. We believe Adjusted EBITDA provides
investors with useful information on period-to-period performance as evaluated
by management and comparison with our past financial performance. We believe
Adjusted EBITDA is useful in evaluating our operating performance compared to
that of other companies in our industry, as this metric generally eliminates the
effects of certain items that may vary from company to company for reasons
unrelated to overall operating performance.
See "Reconciliation of Non-GAAP Financial Measures" below for information
regarding the limitations of using our Adjusted EBITDA as a financial measure
and for a reconciliation of our net loss to Adjusted EBITDA, the most directly
comparable financial measure calculated in accordance with GAAP.
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Other Key Metrics
We also regularly monitor and review the number of DOS Subscription Clients and
Dollar-based Retention Rate as shown in the following tables:
DOS Subscription Clients
As of December 31,
2022 2021 2020
DOS Subscription Clients 98 90 74
Since 2016, our primary contracting model is a subscription-based contract to
our DOS platform, analytics applications, and professional services. Given how
fundamental DOS is to our Solution and because the vast majority of our total
revenue is derived from DOS Subscription Clients, we believe our DOS
Subscription Client count is a representation of our market penetration and the
growth of our business. We have updated the name of this key metric to DOS
Subscription Clients from DOS Subscription Customers used in prior filings as we
feel that the client reference more fully depicts the deep, long-standing,
multi-faceted relationships we strive to build with the entities we serve.
DOS Subscription Clients are defined as clients who directly or indirectly
access our DOS platform via a technology subscription contract. Indirect access
to the DOS platform may include DOS module components such as Healthcare.AI, Pop
Analyzer, IDEA, and other DOS platform components. Given the variety of ways to
access DOS and the mix of specific components of DOS available to be included in
a subscription contract, average subscription revenue for new DOS Subscription
Clients in a given calendar year can vary. Although subscription revenue from
individual DOS Subscription Client arrangements may vary dramatically, we
generally expect average subscription revenue for new DOS Subscription Clients
in a calendar year will range between $500,000 and $1,500,000 .
The average subscription revenue for DOS Subscription Clients signed in the
twelve-month period ended December 31, 2022 (2022 DOS Subscription Clients), for
instance, was towards the midpoint of the average expected range, in part driven
by some heightened interest in stand-alone DOS module components, such as
Healthcare.AI, which results in subscription revenue that is significantly lower
than subscription revenue derived from a contract that includes direct access to
all of the DOS platform components. We believe those lower subscription revenue
contracts for stand-alone DOS module components enable a shorter sales cycle,
provides greater deal certainty in challenging macroeconomic times, and provides
an opportunity to expand our relationship and increase future revenue with those
clients over time. Meanwhile, other contracts with new 2022 DOS Subscription
Clients resulted in subscription revenue 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.
Our net new DOS Subscription Client additions were lower in 2022 as compared to
2021, and we expect our 2023 net new DOS Subscription Client additions to also
be lower compared to 2021 due to the continued financial strain and budget
constraints in our end-market.
Dollar-based Retention Rate
Year Ended December 31,
2022 2021 2020
Dollar-based Retention Rate 100 % 112 % 102 %
We calculate our Dollar-based Retention Rate as of a period end by starting with
the sum of the technology and professional services Annual Recurring Revenue
(ARR) from our DOS Subscription Clients as of the date 12 months prior to such
period end (prior period ARR). We then calculate the sum of the ARR from these
same clients as of the current period end (current period ARR). Current period
ARR includes any upsells and also reflects contraction or attrition over the
trailing twelve months but excludes revenue from new DOS Subscription Clients
added in the current period. We then divide the current period ARR by the prior
period ARR to arrive at our Dollar-based Retention Rate. We calculate ARR for
each DOS Subscription Client as the expected monthly recurring revenue of our
clients as of the last day of a period multiplied by 12. Because our primary
business model is to contract for our DOS platform, analytics applications, and
professional services, our Dollar-Based Retention Rate calculated above only
includes our DOS Subscription Clients. Other Clients that do not meet the
definition of a DOS Subscription Client, which are primarily legacy Medicity ,
Able Health , Healthfinch, Vitalware, Twistle, KPI Ninja, and ARMUS clients, are
not included in the Dollar-based Retention Rate metrics.
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Given the nature of our technology contracts, which, for many DOS platform clients, are generally priced for multi-year periods and have built-in, contractual escalators, we would generally anticipate less variation within our Dollar-based Retention Rate for technology fees as a result of current challenging macroeconomic factors. However, our technology Dollar-based Retention Rate decreased as ofDecember 31, 2022 compared toDecember 31, 2021 primarily due to the loss of a large enterprise DOS platform client, a decline in our sales pipeline with respect to parts of our Solution that do not offer near-term ROI, such as our clinically-focused technology offerings, and a few clients reducing their near-term spend with us in an effort to meet their short-term budget requirements. As noted, our Dollar-based Retention Rate Key Metric excludes Other Clients who are not DOS Subscription Clients, including clients added through acquisition, as the go-forward technology revenue growth profiles of these businesses may vary from our core DOS Subscription Clients. For example,Medicity clients have generated a lower Dollar-based Retention Rate than DOS Subscription Clients and we expect flat to declining revenue fromMedicity clients in the foreseeable future. The financial strain imposed by COVID-19 on a number of our clients led to a meaningfully lower professional services dollar-based retention in 2020 compared to prior years due to discounts provided to support our clients through the financial strain related to the initial outbreak. We did not provide similar discounts during 2021 and saw improvement in our Dollar-based Retention Rate for professional services fees compared to 2020. However, 2022 proved to be a more challenging year than anticipated as a result of the inflationary macroeconomic environment and the meaningful financial strain that our health system end market faced, which contributed to a lower Dollar-based Retention Rate compared to 2021. We anticipate that there will continue to be variation in our professional services Dollar-based Retention Rate in the near term, however, we expect it to improve in 2023 relative to 2022, primarily driven by opportunities in our Tech-enabled Managed Services offering. While the vast majority of our professional services revenue are recurring in nature, we also provide clients with an option to engage with us for non-recurring, project-based professional services fees. These non-recurring, project-based fees are less predictable than our recurring services and can drive fluctuations in quarterly professional services revenues and in prior period comparisons. Reconciliation of Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations, as a component in determining employee bonus compensation, and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Adjusted gross profit and adjusted gross margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue
less cost of revenue, excluding depreciation and amortization, adding back
stock-based compensation, acquisition-related costs, net, and restructuring
costs, as applicable. We define Adjusted Gross Margin as our Adjusted Gross
Profit divided by our revenue. We believe Adjusted Gross Profit
and Adjusted Gross Margin are useful to investors as they eliminate the impact
of certain non-cash expenses and allow a direct comparison of these measures
between periods without the impact of non-cash expenses and certain other
non-recurring operating expenses. We present both of these measures for our
technology and professional services business. We believe
these non-GAAP measures are useful in evaluating our operating performance
compared to that of other companies in our industry, as these metrics generally
eliminate the effects of certain items that may vary from company to company for
reasons unrelated to overall profitability.
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The following is a reconciliation of revenue to our Adjusted Gross Profit and Adjusted Gross Margin in total and for technology and professional services for the years endedDecember 31, 2022 , 2021, and 2020:
Year Ended
(in thousands, except percentages)
Professional
Technology Services Total
Revenue $ 176,288 $ 99,948 $ 276,236
Cost of revenue, excluding depreciation and amortization (56,642) (86,407) (143,049)
Gross profit, excluding depreciation and amortization 119,646 13,541 133,187
Add:
Stock-based compensation 2,058 8,230 10,288 Acquisition-related costs, net(1) 351 655 1,006 Restructuring costs(2) 229 1,139 1,368 Adjusted Gross Profit$ 122,284 $ 23,565 $ 145,849 Gross margin, excluding depreciation and amortization 68 % 14 % 48 % Adjusted Gross Margin 69 % 24 % 53 % __________________ (1) Acquisition-related costs, net include deferred retention expenses following the ARMUS, KPI Ninja, and Twistle acquisitions. (2) Restructuring costs include severance and other team member costs from workforce reductions.
Year Ended
(in thousands, except percentages)
Professional
Technology Services Total
Revenue $ 147,718 $ 94,208 $ 241,926
Cost of revenue, excluding depreciation and amortization (47,516) (76,838) (124,354)
Gross profit, excluding depreciation and amortization 100,202 17,370 117,572
Add:
Stock-based compensation 2,063 8,047 10,110 Acquisition-related costs, net(1) 61 127 188 Adjusted Gross Profit$ 102,326 $ 25,544 $ 127,870 Gross margin, excluding depreciation and amortization 68 % 18 % 49 % Adjusted Gross Margin 69 % 27 % 53 % __________________
(1) Acquisition-related costs, net includes deferred retention expenses
following the acquisition of Twistle.
Year Ended
(in
thousands, except percentages)
Professional
Technology Services Total
Revenue $ 110,467 $ 78,378 $ 188,845
Cost of revenue, excluding depreciation and
amortization (35,604) (62,473) (98,077)
Gross profit, excluding depreciation and amortization 74,863
15,905 90,768 Add: Stock-based compensation 803 3,453 4,256 Adjusted Gross Profit$ 75,666 $ 19,358 $ 95,024 Gross margin, excluding depreciation and amortization 68 % 20 % 48 % Adjusted Gross Margin 68 % 25 % 50 % 63
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Adjusted Technology Gross Margin remained consistent at 69% for the years endedDecember 31, 2022 and 2021. The year-over-year result was mainly driven by existing clients paying higher technology access fees from contractual, built-in escalators, without the corresponding increase in hosting costs. The increase was offset by headwinds due to the continued costs associated with transitioning a portion of our client base to Azure-hosted environments as well as increased support costs without a commensurate increase in revenue. 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 on-premise and our managed data centers to third-party hosted data centers with Microsoft Azure and the migration of a subset of clients to our multi-tenant, Snowflake andDatabricks -enabled data platform environment, as well as a small subset of modular clients reducing their software analytics application costs, which tend to be higher margin offerings. Adjusted Professional Services Gross Margin decreased from 27% for the year endedDecember 31, 2021 to 24% for the year endedDecember 31, 2022 , due primarily to a change in the mix of professional services we provided and lower utilization rates. Our professional services are comprised of data and analytics services, domain expertise services, Tech-enabled Managed Services, 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. We expect Adjusted Professional Services Gross Margin to fluctuate on a quarterly basis and to decline in the near term 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 the uncertain and challenging macroeconomic environment. Specifically, in the near term we expect our mix of services to include more Tech-enabled Managed Services, which have minimal initial services gross margins that gradually increase over time as the company drives efficiencies in service delivery through the use of our technology. As part of our Tech-enabled Managed Services contracts, we often re-badge existing health system team members within the applicable functional area asHealth Catalyst team members. We often provide a client with a near-term discount relative to their existing costs for the scope of the Tech-enabled Managed Services opportunity, and we drive incremental gross margin over time by leveraging our technology and know-how to make processes more efficient and reduce the client's labor costs. While there will likely be a headwind to gross margin from these Tech-enabled Managed Services in the near term, we believe this model will benefit our mid and long-term Adjusted EBITDA and profitability targets due to improved direct margin on these services over time, our ability to drive operating leverage with lower relative incremental operating expense investment required, and the fact that these contracts typically result in long-term technology subscription contract renewals or expansion.
Total Adjusted Gross Margin remained consistent at 53% for the years ended
and decline in the near term, primarily due to anticipated growth in
professional services, including Tech-enabled Managed Services.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss
adjusted for (i) interest and other expense, net, (ii) loss on extinguishment of
debt, (iii) income tax benefit, (iv) depreciation and amortization, (v)
stock-based compensation, (vi) acquisition-related costs, net, (vii)
restructuring costs, and (viii) non-recurring lease-related charges. We view
acquisition-related expenses when applicable, such as transaction costs and
changes in the fair value of contingent consideration liabilities that are
directly related to business combinations, as costs that are unpredictable,
dependent upon factors outside of our control, and are not necessarily
reflective of operational performance during a period. We believe that excluding
the recent restructuring costs allows for more meaningful comparisons between
operating results from period to period as this is separate from the core
activities that arise in the ordinary course of our business. We believe
Adjusted EBITDA provides investors with useful information on period-to-period
performance as evaluated by management and a comparison with our past financial
performance, and is useful in evaluating our operating performance compared to
that of other companies in our industry, as this metric generally eliminates the
effects of certain items that may vary from company to company for reasons
unrelated to overall operating performance. Our Adjusted EBITDA improved
year-over-year as a result of our revenue growth and cost reduction initiatives,
and we generally expect Adjusted EBITDA to continue to improve going forward,
although it may fluctuate from quarter to quarter as a result of the timing of
non-recurring professional services revenue and the seasonality of certain
operating costs, including costs related to our Healthcare Analytics Summit
(HAS), which has previously occurred in the third quarter of each year.
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The following is a reconciliation of our net loss to Adjusted EBITDA for the
years ended
Year Ended December 31,
2022 2021 2020
(in thousands)
Net loss $ (137,403) $ (153,210) $ (115,017)
Add:
Interest and other expense, net 1,678 16,458
11,572
Loss on extinguishment of debt - -
8,514
Income tax benefit (4,280) (6,898)
(1,194)
Depreciation and amortization 48,297 37,528
18,725
Stock-based compensation 72,104 65,145
37,957
Acquisition-related costs, net(1) 4,894 27,929
16,758
Restructuring costs(2) 8,425 -
–
Non-recurring lease-related charges(3) 3,798 1,800 1,398 Adjusted EBITDA$ (2,487) $ (11,248) $ (21,287) __________________ (1)Acquisition-related costs, net includes third-party fees associated with due diligence, deferred retention expenses, post-acquisition restructuring costs incurred as part of business combinations, and changes in fair value of contingent consideration liabilities for potential earn-out payments. For additional details refer to Notes 1, 2, and 7 in our consolidated financial statements. (2)Restructuring costs include severance and other team member costs from workforce reductions, impairment of discontinued capitalized software projects, and other miscellaneous charges. For additional details, refer to Note 11 in our consolidated financial statements. (3)Non-recurring lease-related charges includes lease-related impairment charges for the subleased portion of our corporate headquarters and duplicate rent expense incurred during the relocation of our corporate headquarters. For additional details refer to Note 9 in our consolidated financial statements.
Key Factors Affecting Our Performance
We believe that our future growth, success, and performance are dependent on
many factors, including those set forth below. While these factors present
significant opportunities for us, they also represent the challenges that we
must successfully address in order to grow our business and improve our results
of operations.
•Impact of challenging macroeconomic environment, including high inflation and
high interest rates, and the lingering effects of the COVID-19 pandemic. Recent
macroeconomic challenges (including the high levels of inflation and high
interest rates), the tight labor market, and the lingering effects of the
COVID-19 pandemic continue to adversely affect workforces, organizations,
governments, clients, economies, and financial markets globally, leading to an
economic downturn and increased market volatility. They have also disrupted the
normal operations of many businesses, including ours. Our health system end
market is currently experiencing meaningful financial strain from significant
inflation with increases in labor and supply costs without a commensurate
increase in revenue, leading to significant margin pressure. This margin
pressure along with the lingering effects the COVID-19 pandemic could continue
to decrease healthcare industry spending, adversely affect demand for our
technology and services, cause one or more of our clients to file for bankruptcy
protection or go out of business, cause one or more of our clients to fail to
renew, terminate, or renegotiate their contracts, affect the ability of our
sales team to travel to potential clients and the ability of our professional
services teams to conduct in-person services and trainings, impact expected
spending from new clients, negatively impact collections of accounts receivable,
and harm our business, results of operations, and financial condition. It is not
possible for us to predict the duration or magnitude of the adverse results of
the challenging macroeconomic environment and its effects on our business,
results of operations, or financial condition at this time.
•Add new clients. We believe our ability to increase our client base will enable
us to drive growth. Our potential client base is generally in the early stages
of data and analytics adoption and maturity. We expect to further penetrate the
market over time as potential clients invest in commercial data and analytics
solutions. As one of the first data platform and analytics vendors focused
specifically on healthcare organizations, we have an early-mover advantage and
strong brand awareness. Our clients are large, complex organizations who
typically have long procurement cycles which may lead to declines in the pace of
our new client additions.
65
-------------------------------------------------------------------------------- Table of Contents •Leverage recent product and services offerings to drive expansion. We believe that our ability to expand within our client base will enable us to drive growth. Over the last few years, we have developed and deployed several new analytics applications including PowerCosting (formerly known as CORUS), PowerLabor, Touchstone, Patient Safety Monitor, Pop Analyzer (formerly known as Population Builder), Value Optimizer, and others. Because we are in the early stages of certain of our applications' lifecycles and maturity, we do not have enough information to know the impact on revenue growth by upselling these applications and associated services to current and new clients. •Impact of acquisitions. We have acquired multiple companies over the last few years, includingMedicity inJune 2018 ,Able Health inFebruary 2020 , Healthfinch inJuly 2020 , Vitalware inSeptember 2020 , Twistle inJuly 2021 , KPI Ninja inFebruary 2022 , and ARMUS inApril 2022 . 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 fromMedicity 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. •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. In 2022, our technology revenue and professional services revenue represented 64% and 36% of total revenue, respectively. Changes in our percentage of revenue attributable to Technology and Professional Services would impact future Total Adjusted Gross Margin. For example, in 2023 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 return on investment 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 Adjusted Professional Services Gross Margin, impacting our future Total Adjusted Gross Margin. See "Reconciliation of Non-GAAP Financial Measures" above for more information. •Transitions to Microsoft Azure and migration to multi-tenant, Snowflake andDatabricks enabled data platform environment. We incur hosting fees related to providing DOS through a cloud-based environment hosted by Microsoft Azure. We maintain a small number of clients that have deployed DOS on-premise. We are in the process of migrating clients who deployed DOS on-premise to Azure-hosted environments. The Azure cloud provides clients with more advanced DOS product functionality and a more seamless client experience; however, hosting clients in Azure is more costly than on-premise deployments on a per-client basis. We have also started migrating certain clients to our multi-tenant, Snowflake andDatabricks -enabled data platform environment. These transitions have and will continue to result in higher cost of technology revenue and a reduced Adjusted Technology Gross Margin. Recent AcquisitionsARMUS Corporation . OnApril 29, 2022 , we acquired ARMUS, a clinical registry development and data management technology company based inFoster City, California . ARMUS provides data abstraction, data validation, data management, data submission, and data reporting services to support participation in clinical quality registries for healthcare institutions around the world, including health systems, payers, medical device companies, and premier medical societies. The acquisition consideration transferred was$9.4 million and was comprised of net cash consideration of$9.3 million andHealth Catalyst common shares with a fair value of$0.1 million , net of shares subject to revesting that are accounted for as post-acquisition stock-based compensation.
OnFebruary 24, 2022 , we acquired KPI Ninja, a leading provider of interoperability, enterprise analytics, and value-based care solutions based inLincoln, Nebraska . KPI Ninja is known for its powerful capabilities, flexible configurations, and comprehensive applications designed to fulfill the promise of data-driven healthcare. The acquisition consideration transferred was$21.4 million and was comprised of net cash consideration of$18.5 million andHealth Catalyst common shares with a fair value of$2.9 million , net of shares subject to revesting that are accounted for as post-acquisition stock-based compensation. 66 -------------------------------------------------------------------------------- Table of ContentsTwistle, Inc. OnJuly 1, 2021 , we acquiredTwistle, Inc. (Twistle), a healthcare patient engagement SaaS technology company that automates patient-centered communication between care teams and patients to transform the patient experience, drive better care outcomes, and reduce healthcare costs. We anticipate that Twistle's leading clinical workflow and patient engagement platform, paired with theHealth Catalyst population health offering, will enable a comprehensive go-to-market solution to address the population health needs of healthcare and life science organizations. The acquisition consideration transferred was$91.9 million , consisting of net cash consideration of$46.7 million ,Health Catalyst common shares with a fair value of$43.1 million , and contingent consideration based on certain earn-out performance targets for Twistle during an earn-out period that ended onJune 30, 2022 , which had an initial estimated fair value of$2.1 million . The earn-out contingent consideration liability was settled during the third quarter of 2022.Vitalware, LLC OnSeptember 1, 2020 , we acquiredVitalware, LLC (Vitalware), a provider of revenue workflow optimization and analytics SaaS technology solutions to healthcare organizations, in a transaction accounted for as a business combination. Vitalware's flagship offering is a chargemaster management solution that delivers analytics for the complex regulatory and compliance functions needed by healthcare provider systems. Additionally, Vitalware brings to bear newer product suites to help health systems capture lost revenue and to support compliance with expanding pricing transparency regulation. The acquisition consideration transferred was$119.2 million and was comprised of net cash consideration of$69.6 million ,Health Catalyst common shares with a fair value of$41.3 million , and contingent consideration based on certain earn-out performance targets for Vitalware during an earn-out period that ended onMarch 31, 2021 , which had and initial estimated fair value of$8.3 million . The purchase resulted inHealth Catalyst acquiring 100% ownership in Vitalware. The earn-out contingent consideration liability was settled during the second quarter of 2021.
OnJuly 31, 2020 , we acquiredHealthfinch, Inc. (Healthfinch), which provides a workflow integration engine delivering insights and analytics into EMR workflows to automate physicians' ability to close patient care gaps in real-time, in a transaction accounted for as a business combination. We believe this acquisition will strengthen our existing population health capabilities. The acquisition consideration transferred was$50.5 million and was comprised of net cash consideration of$16.9 million ,Health Catalyst common shares with a fair value of$27.8 million , and contingent consideration based on certain earn-out performance targets for Healthfinch during an earn-out period that ended onJuly 31, 2021 , which had an initial fair value of$5.8 million . The purchase resulted inHealth Catalyst acquiring 100% ownership in Healthfinch. Approximately half of the earn-out was settled during the third quarter of 2021 and the remaining amount was settled during the first quarter of 2022.
OnFebruary 21, 2020 , we acquiredAble Health, Inc. (Able Health ), a leading SaaS provider of quality and regulatory measurement tracking and reporting to healthcare providers and risk-bearing entities, in a transaction accounted for as a business combination. We believe this acquisition will strengthenHealth Catalyst's Quality and Regulatory Measures capabilities. The acquisition consideration transferred was$21.5 million and was comprised of net cash consideration of$15.2 million ,Health Catalyst common shares with a fair value of$3.3 million , and contingent consideration based on achievement ofAble Health specified incremental client billings for the year endedDecember 31, 2020 , which had an initial fair value of$3.0 million . The purchase resulted inHealth Catalyst acquiring 100% ownership inAble Health . The earn-out contingent consideration liability was settled during the first quarter of 2021.
Components of Our Results of Operations
Revenue
We derive our revenue from sales of technology and professional services. For the years endedDecember 31, 2022 , 2021, and 2020, technology revenue represented 64%, 61%, and 58% of total revenue, respectively, and professional services revenue represented 36%, 39%, and 42% of total revenue, respectively. 67
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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. Professional services revenue. Professional services revenue primarily includes analytics services, domain expertise services, Tech-enabled Managed Services, and implementation services. Professional services arrangements typically include a fee for making FTE services available to our clients on a monthly basis. FTE services generally consist of a blend of analytic engineers, analysts, and data scientists based on the domain expertise needed to best serve our clients. Deferred revenue Deferred revenue consists of client billings in advance of revenue being recognized from our technology and professional services arrangements. We primarily invoice our clients for technology arrangements annually or quarterly in advance. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue and the remaining portion is recorded as deferred revenue, net of current portion on our consolidated balance sheets.
Cost of revenue, excluding depreciation and amortization
Cost of technology revenue. Cost of technology revenue primarily consists of costs associated with hosting and supporting our technology, including third-party cloud computing and hosting costs, license and revenue share fees, contractor costs, and salary and related personnel costs for our cloud services and support teams. 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 the migration of clients to the next iteration of our DOS 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 to Microsoft Azure and the migration of clients to the next iteration of our DOS platform. Cost of professional services revenue. Cost of professional services revenue consists primarily of costs related to delivering our team's expertise in analytics, strategic advisory, improvement, and implementation services. These costs primarily include salary and related personnel costs, travel-related costs, and outside contractor costs. We expect cost of professional services revenue to increase in absolute dollars as we increase headcount to accommodate growth, including Tech-enabled Managed Services.
Operating expense
Sales and marketing. Sales and marketing expenses primarily include salary and
related personnel costs for our sales, marketing, and account management teams,
lead generation, marketing events, including our Healthcare Analytics Summit
(HAS), marketing programs, and outside contractor costs associated with the sale
and marketing of our offerings.
We plan to continue to invest in sales and marketing to grow our client base,
expand in new markets, and increase our brand awareness. The trend and timing of
sales and marketing expenses will depend in part on the timing of our expansion
into new markets and marketing campaigns. Our sales and marketing expenses may
fluctuate as a percentage of our revenue from period to period due to the timing
and extent of these expenses.
Research and development. Research and development expenses primarily include
salary and related personnel costs for our data platform and analytics
applications teams, subscriptions, and outside contractor costs associated with
the development of products. We have developed an open, flexible, and scalable
data platform. We plan to continue to invest in research and development to
develop new solutions and enhance our applications library.
We expect that research and development expenses will increase in absolute
dollars in future periods, but decrease as a percentage of our revenue over the
long term. Our research and development expenses may fluctuate as a percentage
of our revenue from period to period due to the nature, timing, and extent of
these expenses.
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General and administrative. General and administrative expenses primarily include salary and related personnel costs for our legal, finance, people operations, IT, and other administrative teams, including certain executives. General and administrative expenses also include facilities, subscriptions, corporate insurance, outside legal, accounting, directors' fees, and the change in fair value of contingent consideration liabilities. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses, including due to restructuring initiatives.
Depreciation and amortization. Depreciation and amortization expenses are
primarily attributable to our capital investment and consist of fixed asset
depreciation, amortization of intangibles considered to have definite lives, and
amortization of capitalized internal-use software costs.
Interest and other income (expense), net
Interest and other income (expense), net primarily consists of interest expense partially offset by income from our investment holdings. Interest expense in the current year is primarily attributable to the 2.50% Convertible Senior Notes due 2025 (the Notes) and in prior years was primarily attributable to our now extinguished term loan and imputed interest on acquisition-related consideration payable. It also includes the amortization of discounts on debt and amortization of deferred financing costs related to our various debt arrangements. The adoption of ASU 2020-06 during the first quarter of 2022 reduced our reported interest expense as it relates to our convertible senior notes.
Income tax benefit
Income tax benefit consists ofU.S. federal, state, and foreign income taxes. Because of the uncertainty of the realization of the deferred tax assets, we have a full valuation allowance for our net deferred tax assets, including net operating loss carryforwards (NOLs) and tax credits related primarily to research and development. As ofDecember 31, 2022 , we had federal and state NOLs of$591.6 million and$462.9 million , respectively, which will begin to expire for federal and state tax purposes in 2032 and 2023, respectively. Our existing NOLs may be subject to limitations arising from ownership changes and, if we undergo an ownership change in the future, our ability to utilize our NOLs and tax credits could be further limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs and tax credits may also be limited under similar provisions of state law. OnMarch 27, 2020 , the CARES Act was enacted and signed intoU.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. OnMarch 11, 2021 , the American Rescue Plan Act (ARPA) was enacted and signed intoU.S. law to provide additional economic stimulus and tax credits. Changes in tax laws or rates are accounted for in the period of enactment. The income tax provisions of the CARES Act and ARPA do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. The CARES Act also provided for the deferral of an employer's portion of social security payroll taxes for the remainder of 2020. We deferred the social security payroll tax match beginning inApril 2020 and fully paid all related deferred payroll taxes inDecember 2021 . OnAugust 16, 2022 , the Inflation Reduction Act of 2022 (IRA) was enacted and signed intoU.S. law. The IRA includes provisions imposing a 1% excise tax on share repurchases in excess of the fair value of stock issuances, including compensatory stock issuances, that occur afterDecember 31, 2022 and introduces a 15% corporate alternative minimum tax on adjusted financial statement income. We do not expect the tax provisions of the IRA to have a material impact on our consolidated financial statements. 69 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth our consolidated results of operations data and such data as a percentage of total revenue for each of the periods indicated: Year Ended December 31, 2022 2021 2020 (in thousands) Revenue: Technology$ 176,288 $ 147,718 $ 110,467 Professional services 99,948 94,208 78,378 Total revenue 276,236 241,926 188,845
Cost of revenue, excluding depreciation and amortization shown
below:
Technology(1)(2)(3)
56,642 47,516 35,604 Professional services(1)(2)(3) 86,407 76,838 62,473
Total cost of revenue, excluding depreciation and amortization 143,049
124,354 98,077 Operating expenses: Sales and marketing(1)(2)(3) 87,514 75,027 55,411 Research and development(1)(2)(3) 75,680 62,733 53,517 General and administrative(1)(2)(3)(4) 61,701 85,934 59,240 Depreciation and amortization 48,297 37,528 18,725 Total operating expenses 273,192 261,222 186,893 Loss from operations (140,005) (143,650) (96,125) Loss on extinguishment of debt - - (8,514) Interest and other expense, net (1,678) (16,458) (11,572) Loss before income taxes (141,683) (160,108) (116,211) Income tax benefit (4,280) (6,898) (1,194) Net loss$ (137,403) $ (153,210) $ (115,017) __________________
(1)Includes stock-based compensation expense, as follows:
Year
Ended
2022 2021 2020
Stock-Based Compensation Expense: (in thousands)
Cost of revenue, excluding depreciation and amortization:
Technology $ 2,058 $ 2,063 $ 803
Professional services 8,230 8,047 3,453
Sales and marketing 28,082 22,698 13,093
Research and development 12,938 10,213 8,069
General and administrative 20,796 22,124 12,539
Total $ 72,104 $ 65,145 $ 37,957
(2)Includes acquisition-related costs, net, as follows:
Year Ended
2022 2021 2020
Acquisition-related costs, net: (in thousands)
Cost of revenue, excluding depreciation and amortization:
Technology $ 351 $ 61 $ -
Professional services 655 127 -
Sales and marketing 1,894 592 -
Research and development 3,045 901 -
General and administrative (1,051)
26,248 16,758 Total$ 4,894 $ 27,929 $ 16,758 70
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(3)Includes restructuring costs, as follows:
Year Ended December 31,
2022 2021 2020
Restructuring costs: (in thousands)
Cost of revenue, excluding depreciation and amortization:
Technology $ 229 $ - $ -
Professional services 1,139 - -
Sales and marketing 3,023 - -
Research and development 3,410 - -
General and administrative 624 - -
Total $ 8,425 $ - $ -
(4)Includes non-recurring lease-related charges, as follows:
Year Ended December 31,
2022 2021 2020
Non-recurring lease-related charges: (in thousands)
General and administrative $ 3,798 $ 1,800 $ 1,398
Year Ended December 31,
2022 2021 2020
Revenue:
Technology 64 % 61 % 58 %
Professional services 36 39 42
Total revenue 100 100 100
Cost of revenue, excluding depreciation and amortization
shown below:
Technology 21 20 19
Professional service 31 32 33
Total cost of revenue, excluding depreciation and
amortization 52 52 52
Operating expenses:
Sales and marketing 32 31 29
Research and development 27 26 28
General and administrative 22 36 31
Depreciation and amortization 18 16 10
Total operating expenses 99 109 98
Loss from operations (51) (61) (50)
Loss on extinguishment of debt - - (5)
Interest and other expense, net (1) (7) (6)
Loss before income taxes (52) (68) (61)
Income tax benefit (2) (3) (1)
Net loss (50) % (65) % (60) %
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-------------------------------------------------------------------------------- Table of Contents Discussion of the Years EndedDecember 31, 2022 and 2021 Revenue Year Ended December 31, 2022 2021 $ Change % Change (in thousands, except percentages) Revenue: Technology$ 176,288 $ 147,718 $ 28,570 19 % Professional services 99,948 94,208 5,740 6 % Total revenue$ 276,236 $ 241,926 $ 34,310 14 % Percentage of revenue: Technology 64 % 61 % Professional services 36 39 Total 100 % 100 % Total revenue was$276.2 million for the year endedDecember 31, 2022 , compared to$241.9 million for the year endedDecember 31, 2021 , an increase of$34.3 million , or 14%. Technology revenue was$176.3 million , or 64% of total revenue, for the year endedDecember 31, 2022 , compared to$147.7 million , or 61% of total revenue, for the year endedDecember 31, 2021 . The technology revenue growth was primarily from new DOS Subscription Clients, acquired technology clients, revenue from existing clients paying higher technology access fees from contractual, annual escalators, and new offerings of expanded support services. Professional services revenue was$99.9 million , or 36% of total revenue, for the year endedDecember 31, 2022 , compared to$94.2 million , or 39% of total revenue, for the year endedDecember 31, 2021 . The professional services revenue growth is primarily due to implementation, analytics, and other improvement services being provided to new DOS Subscription Clients.
Cost of revenue, excluding depreciation and amortization
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Cost of revenue, excluding depreciation and
amortization:
Technology $ 56,642 $ 47,516 $ 9,126 19 %
Professional services 86,407 76,838 9,569 12 %
Total cost of revenue, excluding depreciation
and amortization $ 143,049 $ 124,354 $ 18,695 15 %
Percentage of total revenue 52 % 51 %
Cost of technology revenue, excluding depreciation and amortization, was $56.6
million for the year ended December 31, 2022 , compared to $47.5 million for the
year ended December 31, 2021 , an increase of $9.1 million , or 19%. The increase
was primarily due to a $4.0 million increase in cloud computing and hosting
costs largely from the expanded use of Microsoft Azure to serve existing and new
clients, a $1.9 million increase in dues, subscriptions, and license and revenue
share fees, a $1.8 million increase in salary and related personnel costs from
an increase in cloud services and support headcount, and a $1.2 million increase
in contractors and outside services.
Cost of professional services revenue was $86.4 million for the year ended
December 31, 2022 , compared to $76.8 million for the year ended December 31,
2021 , an increase of $9.6 million , or 12%. This increase was primarily due to a
$6.0 million increase in salary and related personnel costs from additional
headcount, a $2.2 million increase in contractor and outside service fees, and a
$1.1 million increase in restructuring costs.
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Operating Expenses
Sales and marketing
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Sales and marketing $ 87,514 $ 75,027 $ 12,487 17 %
Percentage of total revenue 32 % 31 %
Sales and marketing expenses were $87.5 million for the year ended December 31,
2022 , compared to $75.0 million for the year ended December 31, 2021 , an
increase of $12.5 million , or 17%. The increase was primarily due to a $5.4
million increase in stock-based compensation, a $3.0 million increase in
restructuring costs, a $2.0 million increase in salary and related personnel
costs from additional headcount, and a $1.2 million increase from travel and
entertainment.
Sales and marketing expense as a percentage of total revenue increased from 31%
in the year ended December 31, 2021 to 32% in the year ended December 31, 2022 .
Research and development
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Research and development $ 75,680 $ 62,733 $ 12,947 21 %
Percentage of total revenue 27 % 26 %
Research and development expenses were $75.7 million for the year ended
December 31, 2022 , compared to $62.7 million for the year ended December 31,
2021 , an increase of $12.9 million , or 21%. The increase was primarily due to a
$4.0 million increase in salary and related personnel costs from additional
development team headcount, a $3.4 million increase in restructuring charges, a
$3.1 million increase in contractor and outside service fees, and a $2.7 million
increase in stock-based compensation.
Research and development expense as a percentage of revenue increased from 26%
in the year ended December 31, 2021 to 27% in the year ended December 31, 2022 .
General and administrative
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
General and administrative $ 61,701 $ 85,934 $ (24,233) (28) %
Percentage of total revenue 22 % 36 %
General and administrative expenses were $61.7 million for the year
ended December 31, 2022 , compared to $85.9 million for the year
ended December 31, 2021 , a decrease of $24.2 million , or (28)%. The decrease was
primarily due to a $28.6 million decrease in change in fair value of contingent
consideration liabilities, which was partially offset by a $2.0 million increase
in lease-related impairment charges, a $1.6 million increase in legal fees, and
a $1.1 million increase in salary and related personnel costs from additional
headcount.
General and administrative expense as a percentage of revenue decreased from 36%
in the year ended
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Depreciation and amortization
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Depreciation and amortization $ 48,297 $ 37,528 $ 10,769 29 %
Percentage of total revenue 18 % 16 %
Depreciation and amortization expenses were $48.3 million for the year
ended December 31, 2022 , compared to $37.5 million for the year
ended December 31, 2021 , an increase of $10.8 million , or 29%. This increase was
primarily due to the amortization of acquired intangible assets from our recent
business acquisitions as well as an increase from capitalized internal-use
software depreciation.
Depreciation and amortization expense as a percentage of revenue increased from
16% in the year ended December 31, 2021 to 18% in the year ended December 31,
2022 .
Interest and other expense, net
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Interest income $ 5,687 $ 831 $ 4,856 584 %
Interest expense (7,239) (17,313) 10,074 58 %
Other income (expense) (126) 24 (150) n/m(1)
Total interest and other expense, net $ (1,678) $ (16,458) $ 14,780 90 %
_______________________________
(1)Not meaningful
Interest and other expense, net decreased$14.8 million , or 90%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . This change is primarily due to a decrease in non-cash interest expense of$10.1 million related to the modified retrospective adoption of ASU 2020-06 and$4.9 million increase in interest and investment income due to an increase in interest rates on our investments. Income tax benefit Year Ended December 31, 2022 2021 $ Change % Change (in thousands, except percentages) Income tax benefit$ (4,280) $ (6,898) $ 2,618 (38) % __________________________ (1)Not meaningful. Income tax benefit decreased$2.6 million , or 38%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . This decrease is primarily related to a decrease in the discrete deferred tax benefits attributable to the release of a portion of the valuation allowance during the respective periods. The releases of valuation allowance are attributable to the acquisition of KPI Ninja and ARMUS in 2022 and Twistle in 2021, which resulted in deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets that had previously been offset by a valuation allowance. 74
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Liquidity and Capital Resources
As of
investments of
general corporate purposes, which may include acquisitions and strategic
transactions. Our cash equivalents and short-term investments are comprised
primarily of money market funds,
corporate bonds, and asset-backed securities.
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. We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months, though we may require additional capital resources in the future. Share repurchase plan OnAugust 2, 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 year endedDecember 31, 2022 , we repurchased and retired 709,139 shares of our common stock for$8.4 million at an average purchase price of$11.81 per share. The total remaining authorization for future shares of common stock repurchases under our Share Repurchase Plan is$31.6 million as ofDecember 31, 2022 .
Secondary Public Equity Offering
InAugust 2021 , we completed an underwritten public offering of 4,882,075 shares (inclusive of the underwriters' over-allotment option to purchase 636,792 shares) of our common stock at$53.00 per share. We received net proceeds of$245.2 million , after deducting the underwriting discounts and commissions and other offering costs.
The offering was made pursuant to an effective shelf registration statement
(File No. 333-258625) filed with the
to use the proceeds for continuing operations and potential future acquisitions.
Convertible senior notes
OnApril 14, 2020 , we issued$230.0 million in aggregate principal amount of 2.50% Convertible Senior Notes due 2025 (the Notes), pursuant to an Indenture datedApril 14, 2020 , withU.S. Bank National Association , as trustee, in a private offering to qualified institutional buyers. We received net proceeds from the sale of the Notes of$222.5 million , after deducting the initial purchasers' discounts and offering expenses payable by us.
Capped Calls
OnApril 8, 2020 , concurrently with the pricing of the Notes, we entered into privately negotiated capped call transactions (Base Capped Calls) with certain financial institutions, or option counterparties. In addition, in connection with the initial purchasers' exercise in full of their option to purchase additional Notes, onApril 9, 2020 , we entered into additional capped call transactions (Additional Capped Calls, and, together with the Base Capped Calls, the Capped Calls) with each of the option counterparties. We used approximately$21.6 million of the net proceeds from the Note Offering to pay the option premium cost of the Capped Calls. The Capped Calls have initial cap prices of$42.00 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce the potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to the cap price.
Refer to Note 10 of our consolidated financial statements for additional details
regarding the private offering of the Notes and the Capped Calls.
75 -------------------------------------------------------------------------------- Table of Contents Cash Flows The following table summarizes our cash flows for the years endedDecember 31, 2022 , 2021, and 2020: Year Ended December 31, 2022 2021 2020 (in thousands) Net cash used in operating activities$ (35,270) $ (23,123) $ (26,148) Net cash used in investing activities (39,021) (139,678) (82,565) Net cash provided by financing activities (2,613) 264,084 182,609 Effect of exchange rate changes on cash and cash equivalents (11) (10) 26
Net increase (decrease) in cash and cash equivalents
Operating activities Our largest source of operating cash flows is cash collections from our clients for technology and professional services arrangements. Our primary uses of cash from operating activities are for employee-related expenses, marketing expenses, and technology costs. For the year endedDecember 31, 2022 , net cash used in operating activities was$35.3 million , which included a net loss of$137.4 million . Non-cash charges primarily consisted of$72.1 million in stock-based compensation,$48.3 million in depreciation and amortization of property, equipment, and intangible assets,$5.0 million in impairment of long-lived assets, reduced by a$4.7 million net decrease in fair value of contingent consideration liabilities, and a$4.5 million deferred tax benefit. The$3.2 million of payments in excess of the acquisition date fair value to settle the cash-based portion of contingent consideration liabilities was included in the net cash used in operating activities. For the year endedDecember 31, 2021 , net cash used in operating activities was$23.1 million , which included a net loss of$153.2 million . Non-cash charges primarily consisted of$65.1 million in stock-based compensation,$37.5 million in depreciation and amortization of property, equipment, and intangible assets, a$20.0 million net increase in fair value of contingent consideration liabilities, and$11.9 million in amortization of debt discount and issuance costs, reduced by the$7.1 million deferred tax benefit. The$9.1 million of payments in excess of the acquisition date fair value to settle the cash-based portion of contingent consideration liabilities was included in the net cash used in operating activities. For the year endedDecember 31, 2020 , net cash used in operating activities was$26.1 million , which included a net loss of$115.0 million . Non-cash charges primarily consisted of$18.7 million in depreciation and amortization of property, equipment, and intangible assets,$38.0 million in stock-based compensation, a$14.1 million net increase in fair value of contingent consideration liabilities,$8.5 million of loss from the extinguishment of debt, and$8.1 million in amortization of debt discount and issuance costs.
Investing activities
Net cash used in investing activities for the year endedDecember 31, 2022 of$39.0 million was primarily due to$27.8 million used to acquire KPI Ninja and ARMUS,$13.0 million of capitalized internal-use software development costs, and$4.4 million in purchases of property, equipment, and intangible assets. These investing cash outflows were partially offset by the sale and maturity of short-term investments of$315.2 million , reduced by the purchases of short-term investments of$309.0 million . Net cash used in investing activities for the year endedDecember 31, 2021 of$139.7 million was primarily due to purchases of short-term investments of$261.4 million , reduced by the sale and maturity of short-term investments of$186.9 million . There were also investing cash outflows of$46.8 million to acquire Twistle,$11.8 million in purchases of property, equipment, and intangible assets, including leasehold improvements and furnishings for our new corporate headquarters, and$6.6 million of capitalized internal-use software development costs. Net cash used in investing activities for the year endedDecember 31, 2020 of$82.6 million was primarily due to$101.7 million used in current year business acquisitions and$9.0 million in purchases of property, equipment, and intangible assets. These investing cash outflows were partially offset by the sale and maturity of short-term investments of$219.1 million , reduced by the purchases of short-term investments of$189.5 million . 76
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Financing activities
Net cash used in financing activities for the year endedDecember 31, 2022 of$2.6 million was primarily the result of$8.4 million in repurchases of common stock and$1.3 million in payments of acquisition-related obligations, partially offset by$4.0 million in stock option exercise proceeds and$3.2 million in proceeds from our ESPP. Net cash provided by financing activities for the year endedDecember 31, 2021 of$264.1 million was primarily the result of$245.2 million in public offering proceeds, net of underwriters' discounts and commissions,$20.4 million in stock option exercise proceeds, and$4.8 million in proceeds from our ESPP, reduced by the$6.3 million in payments of acquisition-related obligations. Net cash provided by financing activities for the year endedDecember 31, 2020 of$182.6 million was primarily the result of$222.5 million in net proceeds from the private offering of the Notes,$36.3 million in stock option exercise proceeds, and$4.3 million in proceeds from our ESPP, reduced by the$57.0 million payoff of the OrbiMed Credit Facility,$21.7 million used to purchase Capped Calls, including issuance costs, and the$1.6 million in payments of acquisition-related obligations.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. We base our estimates, assumptions, and judgments on our knowledge and experience about past and current events and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions, and judgments on an ongoing basis. The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below. Revenue recognition
We derive our revenues primarily from technology subscriptions and professional
services. We determine revenue recognition by applying the following steps:
•Identification of the contract, or contracts, with a client;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the
contract; and
•Recognition of revenue when, or as, we satisfy the performance obligation.
We recognize revenue net of any taxes collected from clients and subsequently
remitted to governmental authorities.
Technology revenue
Technology revenue primarily consists of subscription fees charged to clients
for access to use our technology. We provide clients access to our technology
through either an all-access or limited-access, modular subscription.
The majority of our subscription arrangements are cloud-based and do not provide
clients the right to take possession of the technology or contain a significant
penalty if the client were to take possession of the technology. Revenue from
cloud-based subscriptions is recognized ratably over the contract term beginning
on the date that the service is made available to the client. Our subscription
contracts generally have a three or five-year term, of which many are terminable
after one year upon 90 days' notice.
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Subscriptions that allow the client to take software on-premise without significant penalty are treated as time-based licenses. These arrangements generally include access to technology, access to unspecified future products, and maintenance and support. Revenue for upfront access to our technology library is recognized at a point in time when the technology is made available to the client. Revenue for access to unspecified future products included in time-based license subscriptions is recognized ratably over the contract term beginning on the date that the access is made available to the client.
Professional services revenue
Professional services revenue primarily includes data and analytics services, domain expertise services, Tech-enabled Managed Services, and implementation services. Professional services arrangements typically include a fee for making full-time equivalent (FTE) services available to our clients on a monthly basis. FTE services generally consist of a blend of analytic engineers, analysts, and data scientists based on the domain expertise needed to best serve our clients. Professional services are typically considered distinct from the technology offerings and revenue is generally recognized as the service is provided using the "right to invoice" practical expedient.
Contracts with multiple performance obligations
Many of our contracts include multiple performance obligations. We account for performance obligations separately if they are capable of being distinct within the context of the contract. In these circumstances, the transaction price is allocated to separate performance obligations on a relative standalone selling price basis. We determine standalone selling prices based on the observable price a good or service is sold for separately when available. In cases where standalone selling prices are not directly observable, based on information available, we utilize the expected cost plus a margin, adjusted market assessment, or residual estimation method. We consider all information available including our overall pricing objectives, market conditions, and other factors, which may include client demographics and the types of users. Standalone selling prices are not directly observable for our all-access and limited-access technology arrangements, which are composed of cloud-based subscriptions, time-based licenses, and perpetual licenses. For these technology arrangements, we generally use the residual estimation method due to a limited number of standalone transactions and/or prices that are highly variable.
Variable consideration
We have also entered into at-risk and shared savings arrangements with certain clients whereby we receive variable consideration based on the achievement of measurable improvements which may include cost savings or performance against metrics. For these arrangements, we estimate revenue using the most likely amount that we will receive. Estimates are based on our historical experience and best judgment at the time to the extent it is probable that a significant reversal of revenue recognized will not occur. Due to the nature of our arrangements, certain estimates may be constrained until the uncertainty is further resolved.
Business combinations
The results of businesses acquired in a business combination are included in our
consolidated financial statements from the date of the acquisition. Purchase
accounting results in assets and liabilities of an acquired business generally
being recorded at their estimated fair value on the acquisition date. Any excess
consideration over the fair value of the identifiable assets acquired and
liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed on each
acquisition accounted for as a business combination in order to record the
tangible and intangible assets acquired and liabilities assumed based on our
best estimate of fair value. Determining the fair value of assets acquired and
liabilities assumed requires management to use significant judgment and
estimates including the selection of valuation methodologies, estimates of
future revenue and cash flows, discount rates, and selection of comparable
companies. Significant estimation is required in determining the fair value of
the client-related intangible assets and technology-related intangible assets.
The significant estimation is primarily due to the judgmental nature of the
inputs to the valuation models used to measure the fair value of these
intangible assets, as well as the sensitivity of the respective fair values to
the underlying significant assumptions. We typically use the income approach or
cost approach to measure the fair value of intangible assets. The significant
assumptions used to form the basis of the estimates included the number of
engineer hours required to develop technology, expected revenue including
revenue growth rates, rate and timing of obsolescence, royalty rates and
earnings before interest, taxes, depreciation and amortization (EBITDA) margin
used in the estimate for client relationships, and backlog. Many of these
significant assumptions are forward-looking and could be affected by future
economic and market conditions. We engage the assistance of valuation
specialists in concluding on fair value measurements in connection with
determining fair values of material assets acquired and liabilities assumed in a
business combination. Transaction costs associated with business combinations
are expensed as incurred and are included in general and administrative expense
in our consolidated statements of operations and comprehensive loss.
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We record goodwill as the difference between the aggregate consideration paid for a business combination and the fair value of the identifiable net tangible and intangible assets acquired.Goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings, client relationships, and the expected cash flows resulting from these efforts.Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations.Goodwill is assessed for impairment annually onOctober 31 or more frequently if indicators of impairment are present or circumstances suggest that impairment may exist.
Our first step in the goodwill impairment test is a qualitative analysis of
factors that could be indicators of potential impairment. Judgment in the
assessment of qualitative factors of impairment may include changes in business
climate, market conditions, or other events impacting the reporting unit.
Next, if a quantitative analysis is necessary, we compare the fair value of the reporting unit with its carrying amount, including goodwill. Performing a quantitative goodwill impairment test includes the determination of the fair value of a reporting unit, which requires management to use significant judgment and estimation. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of the reporting units, as well as the sensitivity of the respective fair values to the underlying significant assumptions. We typically use the income or market approach to measure the fair value of reporting units. The significant assumptions used to form the basis of the estimates include, among others, the selection of valuation methodologies, estimates of expected revenue, including revenue growth rates, and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, and the selection of appropriate market comparable companies. Many of these significant assumptions are forward-looking and could be affected by future economic and market conditions. When a quantitative analysis is necessary, we engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining the fair values of our reporting units.
If the fair value of the reporting unit exceeds its carrying amount, the
goodwill of the reporting unit is not considered impaired. If the carrying
amount of the reporting unit exceeds its fair value, we would recognize a
goodwill impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value.
Stock-based compensation
Stock-based awards, including stock options, restricted stock units (RSUs),
performance-based restricted stock units (PRSUs), and restricted shares are
measured and recognized in the consolidated financial statements based on the
fair value of the award on the grant date or, when applicable, the modification
date. The grant date fair value of our stock-based awards is typically
determined using the market closing price of our common stock on the date of
grant; however, we also consider whether any adjustments are required when the
market closing price does not reflect certain material non-public information
that we know but is unavailable to marketplace participants on the date of
grant. The expense is recognized straight-line over the vesting period for
awards with a service condition. The accelerated attribution method is used for
PRSUs.
We record forfeitures of stock-based awards as the actual forfeitures occur. For
awards subject to performance conditions, we record expense when the performance
condition becomes probable. Each reporting period, we evaluate the probability
of achieving the performance criteria, estimate the number of shares that are
expected to vest, and adjust the related compensation expense accordingly.
Stock-based compensation expense related to purchase rights issued under the
2019 Health Catalyst Employee Stock Purchase Plan (ESPP) is based on the
Black-Scholes option-pricing model fair value of the estimated number of awards
as of the beginning of the offering period. Stock-based compensation expense is
recognized using the straight-line method over the offering period.
The measurement date for non-employee awards is the date of grant. The
compensation expense for non-employees is recognized, without changes in the
fair value of the award, in the same period and in the same manner as though we
had paid cash for the services, which is typically the vesting period of the
respective award.
We will continue to use judgment in evaluating the assumptions related to our
stock-based compensation on a prospective basis. As we continue to accumulate
additional data related to our common stock, we may have refinements to our
estimates, which could materially impact our future stock-based compensation
expense.
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Restructuring costs
We define restructuring costs as expenses directly associated with restructuring activities. Such costs include severance and related tax and benefit expenses from workforce reductions, impairment of discontinued capitalized software projects, and other miscellaneous charges. In general, we record team member-related severance costs when there is a substantive plan in place and the related costs are probable and estimable. For one-time termination benefits for team members (i.e., no substantive plan or future service requirement), the cost is recorded when the team members are entitled to receive such benefits and the amount can be reasonably estimated.
Recent Accounting Pronouncements
See "Description of Business and Summary of Significant Accounting Policies" in Note 1 to our audited consolidated financial statements included within Item 8 in this Annual Report on Form 10-K for more information.
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