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May 13, 2020, 6:04 a.m. EDT

10-Q: HEALTH CATALYST, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this Quarterly Report on Form 10-Q. 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 "Risk Factors" and "Special Note Regarding Forward-looking Statements."

Overview

COVID-19 Impact

We have observed that the COVID-19 crisis has led the majority of U.S. healthcare providers to prioritize their response to this healthcare pandemic as their number one priority. In many instances, we anticipate this will lead to these organizations realizing a high level of distraction from beginning new vendor relationships. We also anticipate that many healthcare providers may be challenged financially as a result of the COVID-19 pandemic, as their higher margin elective procedures are delayed. We believe these factors may impact the rate at which we add new customers. On the other hand, we have rapidly developed a number of technology and services solutions designed specifically to support healthcare providers during the COVID-19 pandemic. We believe this may enable us to acquire some level of new customers during the COVID-19 pandemic. We benefit from a high level of technology revenue predictability, especially our all-access DOS subscription customers that have built-in, contractual technology revenue escalators. We also have developed a number of technology and services solutions designed specifically to support healthcare providers during the COVID-19 pandemic. We believe these solutions, coupled with our open data platform, should help us continue to drive high levels of customer retention. We do, however, anticipate that many of our healthcare provider customers will likely be challenged financially as a result of the COVID-19 pandemic, as their higher margin elective procedures are delayed. In light of this, we anticipate we could see lower levels of Professional Services net retention relative to historical performance. Importantly, we intend to support our customers through the near-term financial strain they may experience. As such, there may be situations where we provide our Professional Services at a discounted rate, potentially resulting in lower Professional Services revenue and Adjusted Gross Margin.







        Key Financial 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:
                                                               Three Months Ended March 31,
                                                              2020                        2019
                                                            (in thousands, except percentages)
        Total revenue                                   $      45,116                  $ 35,213
        Adjusted Technology Gross Profit                $      16,969                  $ 13,429
        Adjusted Technology Gross Margin                           69   %                    67  %
        Adjusted Professional Services Gross Profit     $       5,071                  $  4,747
        Adjusted Professional Services Gross Margin                25   %                    32  %
        Total Adjusted Gross Profit                     $      22,040                  $ 18,176
        Total Adjusted Gross Margin                                49   %                    52  %
        Adjusted EBITDA                                 $      (5,971)                 $ (6,680)
        


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 employee incentives. Adjusted Gross Profit, Adjusted Gross Margin, and Adjusted EBITDA are non-GAAP financial measures, which we discuss in more detail below.







                                                                           Three Months Ended March 31, 2020
                                                                          (in thousands, except percentages)
                                                                                         Professional
                                                              Technology                   Services               Total
        Revenue                                             $    24,699                $      20,417          $   45,116
        Cost of revenue, excluding depreciation and
        amortization                                             (7,906)                     (16,162)            (24,068)
        Gross profit, excluding depreciation and
        amortization                                             16,793                        4,255              21,048
        Add:
        Stock-based compensation                                    176                          816                 992
        Adjusted Gross Profit                               $    16,969                $       5,071          $   22,040
        Gross margin, excluding depreciation and
        amortization                                                 68   %                       21  %               47  %
        Adjusted Gross Margin                                        69   %                       25  %               49  %
        








                                                                             Three Months Ended March 31, 2019
                                                                            (in thousands, except percentages)
                                                                                           Professional
                                                                Technology                   Services               Total
        Revenue                                               $    20,148                $      15,065          $   35,213
        Cost of revenue, excluding depreciation and
        amortization                                               (6,752)                     (10,574)            (17,326)
        Gross profit, excluding depreciation and amortization      13,396                        4,491              17,887
        Add:
        Stock-based compensation                                       33                          148                 181
        Post-acquisition restructuring costs(1)                         -                          108                 108
        Adjusted Gross Profit                                 $    13,429                $       4,747          $   18,176
        Gross margin, excluding depreciation and amortization          66   %                       30  %               51  %
        Adjusted Gross Margin                                          67   %                       32  %               52  %
        __________________
        








                                                                               Three Months Ended March 31,
                                                                                 2020                  2019
                                                                                      (in thousands)
        Net loss                                                          $      (17,490)          $  (13,720)
        Add:
        Interest and other expense, net                                              621                  945
        Loss on extinguishment of debt                                                 -                1,670
        Income tax provision (benefit)                                            (1,236)                  11
        Depreciation and amortization                                              2,877                2,312
        Stock-based compensation                                                   8,741                1,656
        Acquisition transaction costs(1)                                             875                    -
        Change in fair value of contingent consideration liability(2)               (359)                   -
        Post-acquisition restructuring costs(3)                                        -                  446
        Adjusted EBITDA                                                   $       (5,971)          $   (6,680)
        __________________
        


Key Factors Affecting Our Performance

Leverage recent product and services offerings to drive expansion. We believe that our ability to expand within our customer base will enable us to drive growth. Over the last three years, we have developed and deployed several new analytics applications including CORUS, Touchstone, Patient Safety Monitor, Population Builder, 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 customers.

Components of Our Results of Operations

Professional services revenue. Professional services revenue primarily includes analytics services, domain expertise services, outsourcing services, and implementation services. Professional services arrangements typically include a fee for making full-time equivalent (FTE) services available to our customers 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 customers.

May 13, 2020

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