Ignite Transition And Recent Acquisitions Will Expand Global Footprint

Key Takeaways

• Cross-selling through the Ignite platform is projected to boost client additions and accelerate revenue growth.
  
• Strategic acquisitions and restructuring are expected to improve profitability and enhance net margins.
  
• Transition challenges, strategic exits, and integration risks may impact Health Catalyst's revenue growth, margins, and profitability prospects in the short to medium term.

Catalysts

Provides data and analytics technology and services to healthcare organizations in the United States.

• The anticipated increase in net new platform client additions from 20 in 2024 to 40 in 2025, largely driven by the cross-selling opportunities presented by the Ignite platform, is expected to significantly boost revenue growth.
  
• The modular and lower price point nature of the Ignite platform compared to the DOS software is expected to accelerate the sales cycle and improve client acquisition, positively impacting revenue and earnings.
  
• A forecasted 13% year-over-year growth in technology revenue in 2025, supported by the momentum of Ignite sales and cross-selling initiatives, is anticipated to enhance overall revenue performance.
  
• Recent acquisitions, such as Upfront Healthcare, are expected to contribute to revenue and profit growth as integration efforts are furthered and profitability gains become realized, boosting earnings.
  
• Profitability improvements through strategic restructuring, including a $2 million increase in expected adjusted EBITDA for 2025 due to effective acquisition integration progress, are anticipated to enhance net margins.

Health Catalyst Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Health Catalyst's revenue will grow by 9.7% annually over the next 3 years.
• Analysts are not forecasting that Health Catalyst will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Health Catalyst's profit margin will increase from -22.7% to the average US Healthcare Services industry of 12.2% in 3 years.
• If Health Catalyst's profit margin were to converge on the industry average, you could expect earnings to reach $49.2 million (and earnings per share of $0.57) by about March 2028, up from $-69.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, up from -4.6x today. This future PE is lower than the current PE for the US Healthcare Services industry at 54.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.92%, as per the Simply Wall St company report.

Health Catalyst Future Earnings Per Share Growth

Risks

• The transition to Ignite from DOS is causing a temporary impact on dollar-based retention rate, as the cost efficiencies of Ignite mean that increased adoption doesn't always translate into a proportional increase in revenue in the short term. This could affect future revenue growth in the near term.
  
• The decision to exit TEMS pilots in the ambulatory operations segment will result in a decrease of approximately $9 million in annual professional services revenue, which may impact overall revenue and profitability.
  
• Professional services revenue growth is anticipated to be lower than technology revenue growth, influenced by the move from recurring subscriptions to more nonrecurring project-based arrangements, potentially affecting net margins differently than expected.
  
• Initial deployment costs for Ninja Universe without corresponding revenue are leading to a decrease in technology gross margins, which may affect overall earnings until the associated revenue materializes.
  
• There is execution risk associated with the integration and realization of profitability from recent acquisitions, which, if not managed effectively, could impact earnings and profit growth projections.

Valuation

• The analysts have a consensus price target of $8.636 for Health Catalyst based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $405.1 million, earnings will come to $49.2 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $4.55, the analyst price target of $8.64 is 47.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.