Health Catalyst, Inc

Welcome to the Health Catalyst second quarter 2025 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. To get to as many questions as time permits, we kindly ask that you limit yourself to one question If you have any follow-up, please re-enter the queue. So that others can hear your questions clearly, we ask that you pick up your handset for the best sound quality. And lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Jack Knight, Vice President of Investor Relations.

Jack Knight Good afternoon, and welcome to Health Catalyst Earnings Conference Call for the second quarter of 2025, which ended on June 30, 2025. My name is Jack Knight. I am the Vice President of Investor Relations for Health Catalyst, and with me on the call is Dan Burton, our Chief Executive Officer, Jason Alger, our Chief Financial Officer, and Dan Lesweir, our Chief Operating Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During today's call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our future growth and our financial outlook for Q3 and fiscal year 2025. Growth, trends and targets beyond 2025, our public market value, our CEO transition and recent director appointment, our ability to attract new clients and retain and expand our relationships with existing clients, strategies, the impact of the macroeconomic challenges, including the impact of inflation, tariffs, and the interest rate environment, changes to government funding and payment programs that have and could further negatively impact our end market and the business of our clients, bookings, Our pipeline conversion rates, the demand for deployment and development of our Ignite data and analytics platform and our applications, timing and status of Ignite migrations, acquisition, integration, and strategy, the impact of restructuring, and the general anticipated performance of our business, including our ability to improve profitability. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may materially differ. please refer to the risk factors in our Form 10-K for the full year 2024 filed with the SEC on February 26, 2025, and our Form 10-Q for the second quarter of 2025 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. 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. A reconciliation of non-GAAP financial measures for second quarters of 2025 and 2024 to their most comparable GAAP measures is provided in our press release. However, we have not provided forward-looking guidance for professional services gross margin, the most directly comparable GAAP measure to adjusted professional services gross margin discussed today, technology gross margin, the most directly comparable GAAP measure to adjusted technology gross margin discussed today, and have therefore not provided the related reconciliations of these non-GAAP measures to their most comparable GAAP measures because there are items that are not within our control or cannot be reasonably forecasted. With that, I will turn the call over to Dan Bird. Dan?

Thank you, Jack, and thank you to everyone who has joined us this afternoon. We're happy to share our second quarter 2025 financial performance, along with additional highlights from the second quarter, I am pleased to share that our Q2 2025 revenue of 80.7 million and adjusted EBITDA of 9.3 million outperformed our guidance on each metric. Additionally, we are encouraged with the results of our technology segment, which recorded revenue of 52.9 million for the second quarter of 2025, representing 11% growth year over year. While we remain confident in our long-term strategy and positioning, we are revising our full-year 2025 revenue guidance to $310 million to reflect performance that has been meaningfully impacted by the recent $1 trillion cut to Medicaid and additional billions in research funding cuts. Importantly, even with this downward revision in revenue, we are maintaining our adjusted EBITDA guidance of $41 million for 2025. The revenue revision is driven by four primary factors, each of which has been directly impacted by the Medicaid and research funding cuts that are negatively impacting our end market. First, the largest single contributor to our reduced revenue forecast representing approximately five points of 2025 revenue growth, is an increasing frequency with which our existing platform clients are choosing to pocket the savings associated with their night migration, which often represents a 20-plus percent savings relative to the cost of DOS. We believe that this increased frequency is directly tied to clients' budget pressures resulting from Medicaid and research funding cuts. We feel strong validation in our strategic decision to develop a disruptive next-generation platform in Ignite, which is meaningfully better, faster, more profitable, and cheaper than legacy DOS, as we continue to see our DOS clients migrating to Ignite. Additionally, while we are encouraged to see the cross-selling of applications within our platform client base, These are more frequently coming in smaller bookings amounts, and we have seen some delays in signing expansion contracts with existing platform clients, both as a result of macroeconomic uncertainty and recent funding cuts. This two-part dynamic of platform clients pocketing the Ignite migration savings and the recent trend of platform clients signing fewer and smaller expansion contracts is has led us to reduce our expected dollar-based retention for 2025 to now be in the low 90s. We expect this headwind to subside as we largely complete the Ignite migrations by mid-2026 and as health systems adjust to a new normal after Medicaid and research funding cuts. We are grateful to maintain robust and meaningful relationships with these platform clients including our ability to sustain ongoing relationships with 98 out of our 100 largest platform client relationships by technology revenue from year-end 2024. Of the two relationships we have not maintained, one of these was related to a client bankruptcy event. The second major factor in reducing the 2025 revenue forecasts which represents approximately two points of 2025 revenue growth, relates to our primary focus on client contract profitability moving forward. We have proactively been assessing and changing the structure of a handful of client contract relationships, particularly within our professional services segment, which in some cases reduces our revenue, but also disproportionately improves our profitability. we would estimate the impact of these restructurings to add approximately three points to our company-wide adjusted EBITDA margins on an annualized basis. This focus is a continuation of the prior example we announced in January to exit a few unprofitable pilot ambulatory operations TEMS relationships. We shared that this decision to exit would represent a reduction of approximately $9 million of annual revenue for the company within the services segment of our business. We exited these TEMS contractual components as of June 30th, while maintaining meaningful technology contracts in these client relationships. Additionally, as part of our focus on client profitability, we've introduced tooling and the use of AI to more efficiently manage client platform migrations, which has generally resulted in lower professional services non-recurring contracts, but higher client profitability. The third contributor to the lowered 2025 revenue, which represents approximately one point of 2025 revenue growth, has come from our CareVive business performance, primarily in the life sciences and markets. where a number of opportunities have been meaningfully delayed by research funding cuts. As a reminder, these life sciences opportunities typically have large point-in-time revenue recognition shortly after deal signing. We are now generally excluding these opportunities from our 2025 revenue guidance, so they would represent upside to our guidance. The fourth contributor to lowered 2025 revenue, which represents less than one point of revenue growth, is that our newest platform client additions have come with lower average booking sizes than what we experienced in Q1. And we believe this lower deal size may persist, directly impacted by the Medicaid and research funding cuts. We expect our average booking size for net new platform clients in 2025 to be towards the lower end of the $300K to $700K range previously provided. We experienced some delays in signing new platform client contracts in Q2 as healthcare organizations absorbed the news of impending funding cuts, which caused us to fall short of our projection to be approximately halfway to our 2025 goal of 40 net new platform clients. In light of this shortfall, we are reducing our expectations for net new platform clients to 30 for 2025. Despite this reduction, we have been encouraged to see continued cross-sell momentum with our application clients, including over the past five weeks. And as of today, we have added a total of 22 new platform clients year-to-date. including a few new platform clients signed already in Q3. Importantly, we continue to see our new platform client pipeline growing with approximately 100 new platform client opportunities in the second half of 2025, including contributions from our recent mid-market Ignite Spark campaign. And over 80% of the bookings associated with these opportunities are technology revenue with less than 20% services revenue. With the July passage of the big, beautiful bill, which includes $1 trillion in Medicaid cuts and continued research funding cuts, we now anticipate these impacts to our end market could be a headwind not only in 2025, but likely over the next few years. Due to these headwinds, as well as our updated M&A perspective, that we do not intend to pursue additional acquisitions in the near to midterm, we are removing our previously shared 2028 revenue target of $500 million and our 2028 adjusted EBITDA target of $100 million. Importantly, we are laser focused on profitability improvement, both now and in the future, and our decision to remove the 2028 adjusted EBITDA target is more a function of our focus on delivering on near-term and mid-term profitability improvements for our shareholders. Related to profitability tailwinds, we see continued favorable revenue mix shifts towards more technology revenue, and within our technology segment, more application revenue moving forward. with our applications revenue producing our highest gross margin and our highest adjusted EBITDA margins. Our prioritized shareholder focus in the months and years ahead at Health Catalyst is meaningfully improved profitability. We anticipate that delivering dramatically improved profitability in the form of growth in adjusted EBITDA and adjusted free cash flows enables us to deliver a return on the investment that our shareholders have made in Health Catalyst. We believe we are well positioned to drive this improved profitability, even with multi-year macroeconomic headwinds, because of the strength of our portfolio of technology solutions, particularly our applications offerings, which are enabled by a more flexible and modular Ignite infrastructure. Three years ago, when inflation spiked to a 40-year high, we primarily responded to that headwind by providing our cost-reducing TEMS offering to a smaller group of existing clients to help them counter their cost pressures. While this was helpful to our clients, it was a lower margin offering for Health Catalyst. We did not yet have Ignite to offer our clients. our current strong portfolio of applications, or as large an existing client base. By contrast, today we are responding to the funding cut headwinds with a tech-first offering, with applications that can offer tangible hard dollar value and ROI to potentially help twice the number of existing clients. We can efficiently cross-sell our applications to these existing clients with a much stronger applications portfolio of industry-leading solutions and the flexible and modular Ignite infrastructure to help enable this cross-sell. We are leading with our highest margin offering area, our applications, to help our more than 1,100 existing clients. And this offering is resonating, even in the midst of macroeconomic headwinds. We expect that this will enable us to continue to proactively shift our revenue mix towards the highest quality, highest margin revenue, our applications revenue, enabled by our modular and flexible Ignite infrastructure, and leverage our competitive strength and differentiation in the most effective ways. Over the past 12 months, through Q2 of 2025, our technology segment revenue grew by 9%, During that period, we estimate that our platform revenue declined slightly, while our estimated application revenue grew more than 20% year over year, primarily driven by our cross-sell momentum, both from platform clients buying more apps, app clients buying additional apps, often enabled by Ignite, and from our strategic acquisition activity to bolster the differentiation of our applications portfolio. We estimate that our applications produced a gross margin of over 80% and an estimated adjusted EBITDA margin of 30% during the 12 months ended June 30, 2025. Our strategic acquisition activity over the past several years has primarily focused on acquiring industry-leading applications. enabling us to assemble the strongest portfolio of applications that we have ever offered to our clients. We believe revenue from applications has the potential to grow at a double-digit pace in the years to come, resulting in a continued shift in the mix and quality of our revenue and resulting in gross margin and adjusted EBITDA margin expansion. We also believe we have our greatest competitive differentiation in our application solutions, where we primarily compete against smaller point solution companies with few existing client relationships, with a subscale data aggregation capability, and who often are not yet generating profits. We believe our ability to leverage more than 1,100 existing client relationships in an efficient cross-sell motion With a superior and modular data aggregation infrastructure in Ignite and a track record of delivering measurable value to these clients provides us meaningful long-term differentiation and competitive moats we can maintain. Expanding our applications revenue will continue to be the primary focus of our growth organization in the months and years ahead. We expect that we will continue to benefit strategically from the Ignite platform capabilities, both with our existing Ignite platform clients, as well as with our application clients. After we largely complete the migration of our platform clients to Ignite, expected by mid-2026, we anticipate that the migration-related growth headwind will dissipate, and our platform revenue will move from being flat to slightly down year over year, to a growth contributor to the company. Likewise, we expect that our professional services segment will continue to be positively impacted from a gross margin perspective by our proactive restructuring and, in some cases, exiting of services contracts, like our previously announced decision to exit the ambulatory operations TEMS pilot contracts, which occurred as of June 30th. We expect this will contribute to improving services gross margins in late 2025 and into 2026, but will also result in our services segment being slightly down from a revenue perspective in 2025 and likely in 2026 as well. As part of our primary focus on driving improved profitability and operating efficiency, we have implemented a restructuring effort that streamlines the organization to better align with our current stage and priorities. This restructuring was announced to team members earlier today and is anticipated to be largely complete by next Monday, August 11th. These actions include meaningful non-headcount cost reductions and will also impact approximately 9% of our total workforce. We anticipate this restructuring plan and our previously described updates to client contracts will improve profitability by over $40 million on an annualized basis, which we expect to right-size our cost structure across our business and be accretive to gross margins, adjusted EBITDA margins, and adjusted free cash flows. In the coming days, we will be striving to support impacted team members in making an effective transition and finding new opportunities. We are grateful to these teammates for their contributions to our company. While any team member reduction is difficult and painful, we believe we can manage these transitions without significant disruptions to the business, and we believe they help to appropriately right-size the organization. Our expectation is that this restructuring effort, when combined with our more profitable revenue mix, and our recent renegotiation of certain client contracts enables us to reaffirm our full year 2025 adjusted EBITDA guidance of 41 million, even with a meaningfully lower total revenue guide. We are also providing Q3 adjusted EBITDA guidance of approximately 10.5 million, representing 44% growth in adjusted EBITDA year over year. This Q3 and full-year guidance implies a Q4 adjusted EBITDA of approximately $15 million, which on an annualized basis places the company at a run rate of approximately $60 million of adjusted EBITDA going into 2026. And we anticipate further opportunities for adjusted EBITDA expansion, inclusive of several points of additional operating leverage in R&D and which we plan to realize through expansion in our India operations and pervasive use of AI in 2026 and beyond. This also showcases our rapidly expanding adjusted EBITDA margins, which with our Q3 and four-year revenue guidance also implies adjusted EBITDA margins approaching approximately 20% in Q4 of 2025. well ahead of our original 2028 target of 20% adjusted EBITDA margins for the company. We now believe we can expand adjusted EBITDA margins beyond 20% as our mix continues to shift towards more technology revenue and within the technology segment towards more application revenue. We also anticipate continuing to primarily utilize this expanded adjusted EBITDA and adjusted free cash flow in two primary ways, share repurchases and debt reduction, recognizing that these uses of cash strengthen the return we could offer to shareholders. Also consistent with our focus on improved profitability, we as a management team with support from our board have announced changes to our stock-based compensation practices, which we expect will enable the company's stock-based compensation as a percentage of revenue in 2026 and beyond to be in the mid to high single digits. This includes my request and the Board's support for me to not receive an annual CEO equity grant in 2026, consistent with principles of accountability and servant leadership. This represents an approximate 80% reduction in my total compensation for 2026 and is similar to my request and the Board's support in July 2022 for me to work for zero base salary, zero bonus, and zero equity compensation from July 1st, 2022 through December 31st, 2023. It is also important to note that I continue to be one of Health Catalyst's largest and longest standing shareholders, that I have been a meaningful buyer of shares on the open market over the past three years, and that I will continue to deeply focus on representing shareholder priorities as CEO and as a board member. Each of these decisions contributes to and reinforces our company's laser focus on meaningfully improved profitability As we recognize the fundamental shareholder value creation that this profitability expansion represents, we believe this dramatic growth in the company's adjusted EBITDA and adjusted free cash flow will create fundamental shareholder value. And as such, we expect that as this profitability improvement occurs, there will be a corresponding growth in the company's market value. We believe there is a current disconnect between the company's intrinsic value and the company's public market value, and we anticipate this disconnect will dissipate with continued demonstrated profitability improvement. The board also takes seriously its fiduciary duty to maximize shareholder value and is committed to using all available tools to drive long-term shareholder value creations. Consistent with recent earnings calls and given the strategic importance of Ignite and the importance of the migration of existing platform clients to Ignite, I'll now turn some time over to Dan LaSueur for an Ignite migration update.