Hi all,
This is my first contribution, having followed this board for 8 months or so. I tried to base this write-up on Saul’s post titled “How I pick a company to invest in.” I’d appreciate any feedback on the content/organization of this post.
How I found the company: I became interested in HCAT after reading Bert’s positive take
(https://seekingalpha.com/article/4279470-health-catalyst-usi…). The information below came from the S-1: https://ir.healthcatalyst.com/static-files/d21a5834-f566-41e…
Brief Description: Healthcare’s wasted spending problem is well-known to everyone. This has led to a change from fee-for-service based model to a value-focused model. A key part of value-based care is, intuitively, identifying which aspects of care are providing the most value! Although healthcare has access to massive amounts of data, the industry has not capitalized on it via improved data analytics. HCAT provides a platform (data-operating system: DOS) that enables clients to integrate and organize their data, in addition to using massive data-set HCAT has already collected. Within this platform, HCAT offers different analytics applications to help clients identify performance. Finally, HCAT offers a professional service, which is a team of analytics/data experts to help clients use the technology in-person. Revenue is divided into technology (ie. software as a service) and professional services, both of which are billed on a recurring-basis. HCAT’s strategy to increase revenue moving forward is “land and expand,” similar to other companies on this board.
Moat: The moat appears to be two-fold: superior performance and the DOS integration platform. Superior performance was evaluated via KLAS, Chilmark Research, and Blackbook reviews. Unfortunately, I don’t have access to these, so I’m not sure how meaningful this really is.
The DOS platform appears to be the key competitive moat, although I don’t fully understand the implications of it. Bert’s thoughts are: “HCAT has advantages based on the technology of its platform but most importantly has specific advantages based on its healthcare domain expertise.” To me this means that HCAT’s advantage is that their DOS platform and analytics were built specifically to handle healthcare-specific data and use-cases, in addition to their ever-expanding database set. It’s unclear how sustainable this moat is, and I’d appreciate insight from those who understand the tech better than me.
Revenue: The following table is my calculations of quarter/quarter and year/year revenue increases. The June 2019 data is based on preliminary results published in the S-1. Since these results were published in July (after the end of the quarter), I expect them to be similar to the upcoming results announced on August 22nd. I used the high end of their estimates for June 30 2019 data. The green highlight denotes the first quarter that included Medicity revenues. The revenue accounted for by Medicity for June 2019 quarter wasn’t announced, so I used the median of the prior 3 quarters (6.2 million). The S-1 stated that Medicity revenue would remain flat or decline, so I felt this was a reasonable assumption.
PLEASE NOTE, the revenue table is in the following post, as I couldn’t get the formatting to work.
After the Medicity acquisition, tech and total revenue when up significantly, even after excluding medicity-specific revenues. Per the S-1: “We expect technology revenue growth rates in the second half of 2019 to be lower than the first half of 2019 as we experienced significantly higher technology revenue in the second half of 2018 than the first half of 2018 due to (a) the acquisition of Medicity in June 2018 and (b) perpetual license revenue in the third quarter of 2018 that will not recur.” However, since this large increase, q/q revenue increases have been inconsistent, and the yr/yr comparisons are propped up by large jump after the Medicity acquisition.
Note: Bert did mention some seasonality in the numbers, with 4th quarter revenue generally being the highest. I don’t expect this to continue moving forward: per the S-1, these increases were due to meeting “performance-based revenue arrangements” which are “expected to become a smaller portion of revenue in future 4th quarters.”
Other key numbers:
Dollar based retention rate: 107% (year ending Dec 2018)
Recurring Revenue: 90% of total revenue (per S-1)
Gross Margins: Total revenue: 52% (quarter ending March 2019)
Technology Revenue: 67%
Professional Revenue: 32%
Adjusted EBITDA yr/yr: (9266) to (6680) for quarters ending Mar 2018/19 (28% improvement)
(8028) to (6400-5700) for quarters ending Jun 2018/19 (20-29% improvement)
Summary:
Pros: Health-care specific platform+analytics
Large TAM (estimated at 8 billion, seems like an underestimate compare to vast amount of wasted medical spending)
Technology revenue is becoming larger part of total revenue, should lead to increased Gross margins
Cons: highly competitive field (S-1 lists IBM, epic, Microsoft, Mckesson), as well as small niche analytics company like livongo
Long sales cycle (11 months)
Lumpy revenue
Challenging yearly comparisons
Currently unprofitable
My take: While I like HCAT’s story and want to believe in the narrative, I’m fairly skeptical of the organic revenue growth, and nervous HCAT can’t maintain a high growth rate in the face of tougher quarterly comparisons. For instance, to maintain a 40% growth rate for Sept 2019 quarter, total revenues would have to reach 46015 (thousands), which seems like a stretch given the preliminary June 2019 results. Additionally, the secondary numbers (retention rate, gross margin, decreasing losses) are just ok, and don’t compare favorably to other stocks discussed on this board.
I plan on selling my 4% position this week as I am concerned about the organic growth rate. After this quarter, yearly comparisons will grow more challenging, since previous quarters will start to include Medi-citiy revenue. I am keeping the company on my watch-list, as the “story” of the company remains compelling to me. If HCAT crushes their preliminary numbers and finishes around 40000 (thousands), I would consider buying back in, as the growth story would be better intact.
Please note, this is my first independent company write-up, so as always, do your own research before considering investing in HCAT.
Best,
OC