Health Catalyst Inc Aktie

Welcome to the Health Catalyst First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Stephanie St. Clair, Senior Vice President of Finance and Investor Relations.

Good afternoon, and welcome to Health Catalyst's earnings call for the first quarter of 2026, which ended March 31, 2026. My name is Stephanie Sinclair, Finance and Investor Relations Senior Vice President. With me on the call today are Ben Albert, our Chief Executive Officer; and Jason Alger, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K 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, financial outlook for the second quarter and full year 2026 market conditions, AI initiatives, bookings, retention, operational priorities, strategic and restructuring initiatives, client migrations and the general anticipated performance of our business. 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 most recent Form 10-K for the full year 2025 filed with the SEC on March 12, 2026, and our Form 10-Q for the first quarter of 2026 filed today. We will also refer to certain non-GAAP financial measures to provide additional information to investors. Non-GAAP financial information is presented for supplemental purposes only and for limitations as an analytical tool and should not be considered in isolation or a substitute for financial information presented in accordance with GAAP.

A reconciliation of our non-GAAP financial measures to their most comparable GAAP measures is provided in our press release. We will provide forward-looking guidance for certain non-GAAP financial measures in this earnings call and are not providing forward-looking guidance for the most directly comparable GAAP measures and therefore, have not provided reconciliations because they are items that may impact the comparable GAAP measures that are not within our control or cannot be really forecasted.

With that, I'll turn the call over to Ben.

Thank you, Stephanie, and thank you to everyone for joining us today. We are pleased to report a strong first quarter with solid bookings and results that exceeded expectations on both revenue and adjusted EBITDA. We ended the quarter in a strong cash position and combined with the cost saves from streamlining our operations. We are making progress as we position the company for durable and efficient growth. We are also introducing a new performance metric that we believe provides a clear benchmark of success and issuing full year guidance as promised. .

Jason will detail our performance and outlook in his remarks. But first, I'd like to spend a few minutes sharing learnings from our initial assessment and the actions we've taken and will continue to take with urgency to transform the company's operating model simplify our organizational structure and align resources around our highest conviction technology opportunities. Over the last few months, we have begun examining every dimension of the business. from our cost structure and our product portfolio to our go-to-market approach, organizational design, leadership, technology infrastructure and how we deliver value to clients.

This review has reinforced the strength of our foundation and the need to operate differently. One of the most significant findings from that review was the direct connection between our previous migration strategy and the revenue pressure we are managing this year. Setting a rigid time line for migration efforts over the last 2 years has created a churn dynamic, which is heavily impacted in 2026. It is the area we've addressed most aggressively prioritizing client success and retention to build a more durable revenue base.

As we shared in our March earnings call, we stopped managing the migration as a one-size-fits-all program and conducted a line-by-line review of every remaining client. We developed a tailored plan for each client specific situation and have strengthened the teams dedicated to taking clients through this process, including options where clients stay on us for an extended period of time. The initial review is now complete and gives us a new level of visibility into a path forward. As we look at our business holistically, we believe that Health Catalyst has exceptional core assets including 18 years of proprietary health care improvement data, deep client relationships, proven outcomes and a team that genuinely cares about improving health care.

However, these assets were hampered by a fragmented and cumbersome business structure that created friction and lack focus for clients and teammates. While this accumulated complexity will take time to unwind and will create short-term revenue pressure, we are focused and confident in our plan of action. Ultimately, we believe this short-term impact is necessary to achieve more profitable growth long term.

Importantly, we are building a leadership team that is equipped and eager to execute this plan. We've added significant experience across nearly every function, bringing in operators with vision, executional discipline and a track record of results. We also recently promoted our new Chief Marketing Officer, who is already transforming our messaging, product positioning, and how to take our solutions to market, and our new Chief Growth Officer, who is bringing her excitement and data-driven leadership to our growth function.

At the Board level, we've also made significant changes. We recently welcomed Steve Nelson, who currently serves as the President of Aetna and brings deep health care expertise and public company leadership experience. He previously served as Chief Executive Officer of UnitedHealthcare, Gen Med and Duly Health in Care building and scaling delivery models where health outcomes, provider experience, cost discipline, clinical performance and consumer engagement operated as a single integrated strategy.

Out of our 7 current Board members, he is 1 of 4 Board members who have joined us in the last year, including a new Chair. The Board refresh brings fresh perspective outside expertise and strategic insight. Moving forward, our focus is being a technology business that wins in the market, operating with efficiency and discipline and investing in our AI intelligence that differentiates our solutions. Two weeks ago, we announced a comprehensive operational and business restructuring we're calling Project NEXUS. Is a strategic initiative designed to fundamentally transform our operating model, improve our cost structure and advance each of these priorities.

This initiative is expected to generate annual run rate cost savings of approximately $30 million and accelerate the progress we've already made to integrate our core functions and consolidate our operations under 1 company with 1 commercial approach, 1 client-facing team and 1 set of standards. On the engineering side, we piloted a new development model, utilizing highly efficient pods and proprietary AI development agents. In initial pilots, development teams increased story points delivered by as much as 100% per developer, allowing us to simultaneously reshape our cost structure and accelerate product innovation.

Finally, we are introducing total bookings as a simplified operating metric. We consider investor feedback carefully and believe it is one of the most direct indicators of whether our commercial engine is working. Combined with our guidance and continue to focus on adjusted technology gross margin and cash generation, we believe our metrics will give you a clear and consistent framework to track the success of this transformation. Now let me tell you how the work we are doing positions us for the opportunity ahead and why I took this job. Health care is at the inflection point.

The financial pressure on health systems, voting margins, shifting payer mix, rising labor costs is structural, not cyclical. In this environment, organizations are looking for more than incrementally better tools. They are looking for a partner who can help them reduce costs, improve clinical quality and grow consumer relationships while delivering meaningful outcomes. That is the market we are built for and AI strengthens our ability circuit. Health care data infrastructure has increasingly commoditized. Durable advantage lies in the intelligence built on top of it.

And our advantage, on something no one else has, our wealth improvement data, the link between an intervention, its cost and its measured outcome. -- years and thousands of improvement engagements later, our proprietary data set compounds, building our competitive advantage. A new entrant cannot manufacture this data set retrospectively. These engagements include an evidence base that tells us what reduces cost, improves clinical quality and grow consumer engagement and then can be calibrated to each systems case mix cost structure, workforce, and starting point.

The result is a prescriptive road map that identifies opportunities sized in dollars and interventions ranked by Impac sequenced foundations are in place before the harder work begins. That is the foundation of our AI strategy. We are building a growing suite of genetic AI models across cost management, clinical quality, consumer experience and ambulatory growth embedded in our domain-specific application. These improvement agents will confine multiple layers of machine learning models and LLMs to service the right opportunities for each health system, quantify the impact and guide execution.

We are building a moat by combining our depth of improvement data with purpose-built AI agents at scale. Both that once required months of consulting services and manual effort is being embedded in our technology solutions, and recalculate daily as conditions change, improving with every outcome delivered. I want to add something more personal. I believe that a thriving health system is foundational. As essential as education as central to the fabric of the community as any institution have.

For the communities they serve, health systems provide care, they provide employment and they provide resilience. When they struggle, communities feel it in ways that go far beyond health care. That reality is under threat today, and many communities do not yet see it coming. Health Catalyst exists to help health systems sustain and strengthen that role. Our improvement data is the foundation and AI will allow us to make that expertise efficient scalable and accessible to every system that needs it. That is the company we are building.

In conclusion, we asked for time and we used it to conduct a thorough assessment of the business. We are acting on what we found. We are transforming the company's operating model by simplifying our organizational structure and aligning resources around our highest conviction technology opportunities. We have increased visibility into the [indiscernible] migration impact, and we expect that the majority of that revenue pressure will be absorbed in 2026. These changes to our operating model position us to enter 2027 with a more efficient organization and a commercial engine that will be aligned to where we believe we will win. With that, I'll turn it over to Jason.

Thanks, Ben. I want to start by putting the Q1 results in context. Ben described the transformation we are undertaking and the framework we are using to measure it. The financials this quarter reflect the very early stages of that work. We exceeded our guidance on both revenue and adjusted EBITDA. We are reporting strong Q1 bookings, which gives us confidence our commercial simplification work is gaining traction, and our cost discipline continues to show up in the numbers. Let me walk through the details. For the first quarter of 2026, total revenue was $70.8 million, exceeding the high end of our guided range of $68 million to $70 million. Technology revenue was $49.5 million, and professional services revenue was $21.3 million.

On the top line, I would point to a few things. Our revenue trajectory is beginning to show some of the revenue pressure that Ben discussed that was partially offset by milestone delivery-based revenue and new client revenue. Professional services revenue continues to decline as expected, as we shift toward a more technology-led model, which is by design. Adjusted gross margin for the first quarter was 51.5%, compared to 49.2% in the prior year period. Adjusted technology gross margin was 55.3%, and adjusted professional services gross margin was 19.4%.

Adjusted technology gross margin reflects duplicate hosting costs as we migrate clients to ignite and heavy data loading costs associated with HIE client deployments before revenue can be recognized. We are laser focused on margin expansion as part of the transformation to streamline delivery and optimize our cost structure. We expect that the operational changes that Ben described, which include certain head count and non-headcount changes that impact cost of revenue will begin to show up in Q2 results and will become more evident in the second half of 2026.

Adjusted operating expenses in Q1 were $27.3 million, representing 39% of revenue compared to $32.8 million or 41% of revenue in Q1 2025. We have been disciplined about cost management while protecting investments in areas that directly support the transformation. Adjusted EBITDA for the first quarter was $9.1 million exceeding the high end of our guided range of $7 million to $8 million compared to $6.3 million in Q1 2025. Adjusted net income per share was $0.02, with a weighted average share count of $72.6 million.

Turning to the balance sheet. We ended the quarter with approximately $108.8 million of cash, cash equivalents and short-term investments. As Ben noted, cash generation is a central focus. This Q1 cash, cash equivalents and short-term investments value reflects a $13.1 million increase compared to December 31, 2025. Although we don't anticipate this level of cash generation every quarter, we are managing liquidity carefully, and we expect the restructuring actions we are taking will meaningfully improve our ability to generate cash.

Let me walk to the math of Project Nexus because I think it is important for investors to see how these actions connect to the financial trajectory we are targeting. We expect total second quarter restructuring charges of approximately $4 million, this program spans workforce actions, infrastructure consolidation, and go-to-market realignment. We expect the majority of these charges to be incurred in Q2 with the restructuring substantially complete by year-end. Project Nexus is expected to generate annualized run rate savings of approximately $30 million, inclusive of direct savings of approximately $22 million from the 9% reduction in head count and reductions in non-headcount spend, such as infrastructure, subscriptions and contractors and indirect savings of approximately $8 million from the closing of open head count and cancellation of other previously planned expenses.

It is important to note that these savings are annualized, so not all of the benefit will be seen in 2026. As we think about 2026, we expect our quarterly adjusted operating expenses to decrease by $3 million to $4 million compared to Q1. We also expect our quarterly adjusted cost of revenue to decrease by $1 million to $2 million. These quarterly impacts will start to take effect in Q2 and will ramp throughout the year. We are making meaningful structural changes to how this company operates and what it costs to run.

Today, we are providing full year 2026 guidance. I want to walk through not just the numbers, but how we expect the year to unfold because the shape of the year matters as much as the totals. For full year 2026, we currently expect total revenue of $260 million to $265 million, adjusted EBITDA of $30 million to $33 million. For Q2 2026, we currently expect total revenue of $68 million to $70 million, adjusted EBITDA of $9 million to $10 million.

Our full year revenue guidance reflects the weight of short-term revenue pressure related to the previous migration strategy as what the TAMs and professional services-related revenue reductions and the assessment that Ben described. The churn that we are working through today is largely the result of prior decisions that force clients into an accelerated decision point on the migration before we had the right retention program and client-facing structure in place. On our previous earnings call, we shared certain data points related to the DAS to ignite migration, including the $12.5 million of ARR notified downselling churn and approximately $52 million of potentially at-risk ARR.

Following the client by client review, we anticipate retaining at least $22 million of the previously identified $52 million of at-risk ARR, this leaves approximately $30 million of at-risk ARR, which we are focused on retaining through dedicated account plans tailored to each client's needs. The current expected impact will be approximately $20 million in 2026 and $10 million in 2027. For simplicity, we've provided this detail in a chart in our earnings release.

We would note that a number of clients will continue to use our application solutions going forward even after transitioning to their own infrastructure. As we previously noted, the migration impact is temporary we expect to be generally through the strength of the migration at the end of 2027. This does not mean every migration is complete as we are extending the availability of DAS, but it means we will transition each client when the time is right on what products make sense.

Additionally, the changes we have put in place are helping us to build a more durable revenue base exiting 2027. As we prioritize a mix shift to higher-margin technology revenue, we continue to work with clients on the right services approach. In certain cases, it makes sense for clients to in-source team members, which aligns with our technology-led strategy and improves our margin profile. Our best estimate today is that exiting 2026, our Services segment will be between $55 million and $65 million in revenue annually.

Our Q1 bookings were strong, and our pipeline supports moderate bookings in Q2 and positive bookings momentum in the second half. Over the course of 2026, we expect $22 million to $26 million in new bookings, which includes all ARR and non-recurring revenue. We use new bookings as an operating metric and define it further in our Form 10-Q filed today. We will report results for this new metric on an annual basis, we aim to turn bookings into revenue promptly for the advantage of our clients and our business.

From an adjusted gross margin standpoint, we expect adjusted technology gross margin to fluctuate modestly quarter-to-quarter and to finish the year in the mid-60s. Technology margin expansion is a key focus area of our business moving forward, but it will take time to realize improvement in our financials given duplicate costs from the Ignite migrations and heavy data loading costs associated with HIE client deployments. We anticipate that our adjusted professional services gross margin will decline over the course of the year, as we continue to work through the migrations with a full year margin expectation in the mid- to low teens.

We are targeting adjusted EBITDA that reflects changes to the operating model taking hold. This is the financial case for why the short-term Microson related revenue pain is worth it. We believe our new structure will allow us to lean into high-priority opportunities and realize improving leverage and growth returns. We are managing this business for durable value creation and believe the actions we are taking in 2026 are laying the foundation for that.

With that, I'll turn the call back to Ben.

Thanks, Jason. In closing, I want to thank our clients for their continued partnership and our team members for their commitment during this period of progress and transition. We are energized by the transformation underway and our Board and management team are fully aligned on driving shareholder value. We have a clear plan and are executing with urgency and discipline. We remain confident in the direction of the business and in our ability to create long-term value for our clients and shareholders.

Operator, we are now ready to take questions.

[Operator Instructions] Our first question is coming from Stan Berenshteyn with Wells Fargo.

On the prepared remarks, you mentioned a bigger focus on the technology business. Are there any value-added services that are still part of this vision or is the expectation here that services is going to shrink as a mix of total revenue?

Thank you for the question. The expectation is that services will shrink as we go forward in terms of as a percentage of revenue as we invest in technology-driven opportunities for the company overall. But we certainly see -- and we'll continue to see areas of opportunity for our services in the business and area of example as a chart abstraction. And while we might infuse more AI into the process of our charter abstraction work, we will still have wraparound services to support that because our intention is to meet our clients where they are. And sometimes, that will require utilizing some services in the business. But we will see a mix shift. As we go forward, especially with the AI strategy we're unfolding and how we're really taking advantage of the highest technology opportunities the business has.

We'll now move on to jp John Pinney with Canaccord Genuity.

[indiscernible] Richard Close. I guess I just wanted to get greater detail on -- you said like the shift like the shift from DOS to ignite as kind of a sticking point is trying to force that shift on to people. I guess like what is the hesitation of people shifting? Is it just like the flux that it would create during that shift? Is there something about us that they want to stick with that Ignite doesn't have?

Thanks for the question. There are a couple of things we can answer that with. But DAS provides a lot of value to our clients and our clients have invested a lot in DAS over time. And taking on that transition to a new platform, whether it be Ignite or other is just a lot of work and it requires a tremendous amount of effort. And they get tremendous value from DAS today. So for many clients, they're excited to stay on DAS.

And over time, they may move over to Ignite. And we want to just be able to meet them where they are and support them through that transition as we go forward. So DAS does provide a lot of value, and I think that's what we're seeing.

Now as it relates to the second part of the question, the data platform level has been commoditized a bit. And the value really is in the intelligence that sits on top of the data platform. And we've got this 18 years proprietary improvement data that sits on top of the data platform, and this is on top of Ignite, of course. That we're enabling these AI capabilities off of across these 3 really critical areas of helping our clients manage cost helping them improve the consumer engagement and growth from the ambulatory side of the business and also driving clinical quality. As we invest in AI and use that improvement layer that sits on top of the data platform, we will see more and more take advantage of what Ignite has to offer.

Thank you. We'll move on now to Jeff Garro with Stephens.

Yes. I want to ask about feedback so far on Ignite Intelligence. Curious, what are you hearing from customers in terms of kind of overall budgeting for AI and then feedback on your offering versus efforts or investigations they might have into building it themselves or buying from someone else?

Sure. Thanks, Jeff. The the feedback has been really, really positive as it relates to the initial rollout of our AI capabilities, particularly on the cost management side of the equation, which is very early innings there. And the feedback has been excellent, and we continue to invest more and more in that work to unearth these capabilities that we can provide. And as we talk about what differentiates us and how it really drives measurable improvement for our clients. That's really all about that 18 years of proprietary intelligence that we have on top of the data.

That improvement data is what we call it, and 18 years of projects, thousands of projects to help improve our clients across their -- how they better manage their costs, how they better manage their labor, how better manage their clinical quality and how they better manage their consumer experience. We have that data, and we can enable our clients to utilize that in our AI agents that really will make our solutions much more robust and help them manage the changes going forward. And there's a lot of excitement, and we believe that will be a huge component of our future growth.

We will now move on to Jessica Tassan with Piper Sandler.

I appreciate you reinstating the guide. So kind of a multipart question. Are you able to disclose how many DOS and Ignite customers you have today? And what is the average ARR for DOS customers in '26 versus Ignite customers in '26 and then just when you say data infrastructure is commoditized, I guess, when did that occur? Who are the competitors on the data infrastructure side -- and how much of the DOS or IGNITE ARR would you ascribe to data infrastructure versus the intelligence layer.

Jeff, really appreciate the question. I mean what we have provided in the prepared remarks as well as in the earnings release document. Its full detail around what we expect from a downsell and churn perspective. We don't have a logo count that we'll be disclosing at this point in time. But we'll keep we'll keep everyone apprised of how we're projecting there. It does continue to still be less common for an enterprise client to exit entirely. What we are saying is that clients are generally continuing even if we do see that down sell or churn on the data infrastructure side, we are continuing to maintain those application relationships with us.

And I would just add to the fact you mentioned when did the data platform become commoditized. I think as we've talked on prior calls and indicated that the folks like Databricks coming in and Snowflake and cross-industry tech vendors who are working to really enable that data platform layer, but they lack the intelligence that sits on top. So we're building the infrastructure layer to support these organizations, and that's happening at times. We can still do the whole thing for clients who need that.

But ultimately, what we do now is we have that intelligence layer that can sit on top of that data platform. So that Ignite Intelligence can enable our clients and future clients with a much greater improvement opportunity through the intelligence we provide.

We'll now move on to Eden Conniff with Stifel.

I have a 2-parter. First, in the $30 million of anticipated churn in downsell, is that entirely the data infrastructure layer and then secondly, thanks for providing the bookings metrics. How quickly are you expecting those to then convert to revenue?

I appreciate the question. Yes, related to the $30 million in anticipated churn or downsell, I would say it's heavily focused on the data infrastructure side. it's not 100% data infrastructure. We are seeing some of that churn come out of the application side as well, but primarily focused more on data infrastructure. And then to the to the second part of that question. I'm sorry. Could you repeat that second part, Adan? apologize?

Yes. Just in terms of the bookings you guys provided, how are you thinking about those then converting to revenue in terms of the time frame we should see them peer?

Got it. Yes, I appreciate you repeating Yes. So we would expect bookings to convert into revenue. Typically, it takes about 3 to 6 months for those bookings to convert into revenue. It really does depend on the project or on the technology that we're deploying, but that would be most common would be 3 or 6 months.

Thank you. We'll move on to Daniel Grosslight with Citi.

This is what we saw to Daniel. I know you mentioned earlier in the call that your pipeline supports moderate bookings in 2Q and positive momentum. -- this positive momentum represent like a change in behavior among the tetra clients relative to your initial expectations? Or could you characterize those payer overall study and there's still a little bit addicting the market?

I think it can be attributed to just our approach. I mean we recently added a new Head of Marketing. We've got a new Chief Growth Officer. And we're really focused on how we are taking our platform and our capabilities to market and how we're messaging those solutions in markets. So people understand exactly what it is that we do as an organization. Health systems are still making purchases today. But the bar is definitely higher. The ROI threshold is higher. They don't want just 1 solution.

They want a partner who can provide multiple solutions like we can across cost intelligence labor intelligence or clinical intelligence, consumer intelligence. And so when you can come to them with a message of how well we understand you is 18 years in health care with tremendous improvement data that sits on top of it and then the ability to convert that data into meaningful outcomes and measurable improvement for them across multiple areas of their business. That capability is truly unique and differentiated in the market. And we do anticipate that driving the back half of the year.

[Operator Instructions] We'll move next to Ryan Daniels with William Blair. .

One for you. I just wanted to dig into the dots related ARR churn and potential buy down. Can you talk a little bit more about the $52 million? What actually delineates the $22 million you anticipate to retain versus the $30 million? What are the characteristics defining your ability to retain some of that ARR versus the potential risk? And then what are you guys doing to mitigate that risk going forward? Or is it just likely gone at this point given some of the conversion structure is already in place? .

Thanks for the question. We are working hard to retain as much of that as we can. And as we did our assessment over the last really few months. We went line by line against every dose to ignite migration account and put a plan together to support them. And so we're not going to lose them all. Some will downsell as opposed to full churn, obviously. But ultimately, we do have an approach, and we are hopeful to make some inroads there. We just want to make sure we're communicating clearly we're building credibility and making sure that we're setting the right expectations in the market. But we do have a plan to go and try and retain as much of that revenue as we can through those account by account approaches.

Thank you. There are no further questions at this time. I'm happy to turn the floor back over to Ben Albert for additional or closing remarks.

I'd like to thank everybody for joining us today. I think we're super excited about what health catalyst can become as we go forward. We're very focused right now on the fundamentals, the launch of Project Nexus to transform our operating model and drive our company forward. We're investing in the areas that we believe will drive growth for our organization. We're trying to provide as much transparency as we possibly can. So you can all really understand where our business is and where our business is going. And we recognize that our performance hasn't been where we want it and that we're going to be judged by the performance that we create here, and we're very focused on executing against that. So thank you all very much for joining us today. Appreciate it. .

This concludes today's Health Catalyst First Quarter 2026 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.

Welcome to the Health Catalyst Fourth Quarter and Year-End 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Hopper, Senior Vice President of Finance and Investor Relations.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the fourth quarter and full year 2025, which ended December 31, 2025. My name is Matt Hopper, Senior Vice President of Finance and Head of Investor Relations. With me on the call today are Ben Albert, our Chief Executive Officer; and Jason Alger, our Chief Financial Officer.

A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K 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 be making forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our future growth, financial outlook for the first quarter and full year 2026, our ability to attract new clients and retain and expand our relationships with existing clients, market conditions, macroeconomic challenges, bookings, retention, operational priorities, strategic initiatives, growth strategies, the demand for deployment and development of our Ignite Data and Analytics platform and our applications, timing and status of Ignite migrations and associated churn and pressure from clients, the impact of restructurings and the general anticipated performance of our business.

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 most recent Form 10-Q for the third quarter of 2025 filed with the SEC on November 10, 2025, and our Form 10-K for the full year 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 the fourth quarter and full year 2025 and 2024 to their most comparable GAAP measures is provided in our press release. With that, I'll turn the call over to Ben.

Thank you, Matt, and thank you to everyone for joining us today. Before we discuss the quarter, I'd like to briefly acknowledge the recent leadership transition at Health Catalyst. I stepped into the CEO role last month following Dan Burton's departure as CEO and from the Board of Directors. I want to thank Dan for his many years of service, mission-driven foundation he helped build and his support during this transition. We are focused on the future and on positioning Health Catalyst for long-term success. There are significant opportunities ahead, and I am confident in the strengths that continue to differentiate this company. Our mission, our people and our core capabilities provide a solid foundation for delivering meaningful value to our clients and shareholders.

My priority is to build on these strengths, address our challenges with clarity and discipline and move the company forward with a renewed sense of focus and execution. In my time as President and COO, I conducted a comprehensive review of the business. I've spent 25 years in this industry, and I bring the benefit of an outsider's perspective combined with an insider's understanding of our operations.

That dual vantage point gives me clarity on where we are strong and where we need to change. Not only do I see clear value creation opportunities ahead, I also see areas where we can operate with greater focus, rigor and accountability. We have already moved quickly to tighten leadership focus and execution discipline, including appointing general managers to lead our interoperability and cybersecurity businesses and transitioning our Chief Commercial Officer role to a strong internal successor, who is already driving sharper commercial alignment. We have also opened searches for both a Chief Operating Officer and a Chief Marketing Officer to strengthen operational rigor and to clarify and elevate our position within the market.

At the same time, we are reviewing our cost structure to ensure we are strategically allocating capital with increased discipline, and we are focused on expanding technology bookings and margins while driving cash flow generation as outcomes of this work. We are taking a fresh approach to how we execute, and I'm confident that these actions will put the company on a stronger long-term trajectory. First, our core value proposition is strong.

Our clients continue to rely on Health Catalyst to manage costs, improve clinical quality and drive consumer growth. We have a track record of delivering measurable outcomes. And when we are focused and aligned, we can create real value for our clients. Second, the review made it clear that we need to be more focused and more consistent in how we execute. We have allowed too much complexity into our go-to-market motions, our packaging and our implementation and migration work. This has at times created friction for our clients and slowed our ability to deliver value. We will address this by aligning the organization around a smaller set of priorities, improving clarity across teams and holding ourselves accountable for predictable, measurable outcomes. Third, we have a clear opportunity to sharpen and simplify our commercial story. Our solutions resonate most when we articulate them through the lens of the problems clients are trying to solve.

And we have not been consistent in how we describe the full value we can deliver across cost efficiency, clinical quality and consumer experience. We will tighten our positioning, simplify how we package and present our offerings and implement a more predictable and focused go-to-market motion that highlights what makes Health Catalyst so compelling.

We are refocusing on what we do best, a back-to-basics approach. At our core, we are built to deliver measurable outcomes across cost efficiency, clinical improvement and consumer experience. While the market often thinks of us primarily as a data platform business, our data platform infrastructure has always been a means to an end. The real value of Health Catalyst is in the IP, deep health care expertise and high-value applications we have built or acquired over 15 years, grounded in thousands of improvement projects and billions of dollars of validated impact. That is who we are, that is what we believe the market needs, and that is where we will focus our energy. Additionally, as AI continues to play a bigger role, we expect our valuable data assets and expertise will become an increasingly important driver of competitive differentiation.

With these learnings as our foundation, our priorities going forward are clear. We will strengthen and simplify our commercial engine to drive technology ARR bookings. We will improve retention through more predictable migrations and clear client value realization. We will increase efficiency and reduce time to value by eliminating operational complexity and scaling work through automation and global resources.

And we will better leverage our IP, combining our data foundation with the expertise, content and AI-enabled solutions that allow us to solve some of health care's most pressing problems. These actions begin now, and they will guide how we operate and execute throughout the year. We have also heard a consistent message from our investors. They want our business to be easier to understand with clear indicators of performance and a more streamlined narrative about what we do and how we create value. I agree with that feedback. As part of our renewed focus and discipline, we will simplify how we communicate our business model, our priorities and our progress so that our direction is easier to track and evaluate. As part of this work, we are also evolving the way we measure and communicate performance.

We will focus on providing a new set of bookings and retention metrics that are easier to understand, align directly with our execution and clearly reflect how we operate the business.

You will see us simplify our reporting, improve transparency and reinforce accountability through clear indicators of progress. So while I've already executed an initial comprehensive review as President and COO -- as CEO, our review of opportunities ahead will not stop, and I will continue to evaluate all aspects of the business to ensure we are focusing on maximizing returns for our investors.

This includes a detailed review of our product portfolio, our investment mix and our cost structure. We are assessing where we can simplify and where we should concentrate our resources. This is a shift in how we have operated. We are changing, and we will be more focused and disciplined in how we allocate capital and build long-term value. Given this work and the significant impact some of it may have on our financial results going forward, we are not yet in a position to provide annual guidance.

Today, we are sharing first quarter revenue and adjusted EBITDA guidance only. We believe this is the prudent approach to ensure we are providing initial transparency. And as we continue our strategic and operational review, we plan to come back to the market with our full year revenue and adjusted EBITDA guidance no later than our first quarter earnings call in May. With that, I will turn the call over to our Chief Financial Officer, Jason Alger, to walk through the financial results.

Thanks, Ben. For the full year of 2025, we generated $311.1 million in revenue and $41.4 million of adjusted EBITDA. In the fourth quarter, we continued to demonstrate strong cost control and operating leverage even as we navigated a dynamic demand environment. From a growth standpoint, we finished the year with 32 net new logos, ahead of our target of 30 net new logos, but below our initial expectation of 40 that we began the year with. These net new logos had an average ARR plus nonrecurring revenue near the midpoint of the $300,000 to $700,000 range. Our tech plus TAMs dollar-based retention closed the year at 93%. For the fourth quarter of 2025, total revenue was $74.7 million compared to $79.6 million in the prior year period. Technology revenue was $51.9 million and professional services revenue was $22.8 million.

The year-over-year decline primarily reflects lower professional services revenue from reductions in our FTE service offerings and our exit of unprofitable pilot ambulatory TAMS arrangements. For the full year of 2025, as I mentioned, total revenue was $311.1 million, which represented 1% year-over-year growth. Technology revenue increased 7% year-over-year to $208.3 million, while professional services revenue declined 8% as we continue to prioritize margin improvement and resource efficiency.

Adjusted gross margin for the fourth quarter was 53.5% compared to 46.6% in the prior year period. For the full year of 2025, adjusted gross margin was 51.1%, driven by technology gross margin of 67.4% and professional services gross margin of 18.3%. These results reflect the benefit of restructuring actions implemented during the year, partially offset by migration-related cost headwinds. In the fourth quarter of 2025, adjusted operating expenses were $26.2 million, representing 35% of revenue compared to $29.2 million or 37% of revenue in the fourth quarter of 2024. For the full year of 2025, adjusted operating expenses were $117.7 million, representing 38% of revenue compared to $123.4 million or 40% of revenue for the full year of 2024.

The year-over-year change reflects the continued impact of our restructuring actions, disciplined headcount management and tighter control over discretionary spending. On a sequential basis, adjusted operating expenses declined by approximately $2 million compared to the third quarter of 2025, driven primarily by the full quarter benefit of actions we initiated earlier in the year, including workforce optimization, professional services contract restructuring and operating efficiency initiatives across the organization.

From a GAAP expense standpoint, we would note that we did incur impairment charges on goodwill and intangible assets of $110.2 million during 2025. These charges were primarily due to the decrease in our consolidated market cap and revisions to our forecast and not a write-down of any specific acquisition. These charges were also the main driver in the change in GAAP net loss from $69.5 million in 2024 to $178 million in 2025. Adjusted EBITDA for the fourth quarter of 2025 was $13.8 million compared to $7.9 million in the prior year. For the full year of 2025, adjusted EBITDA was $41.4 million, representing 59% year-over-year growth.

As we look ahead, we remain focused on driving operating leverage, aligning our cost structure with our revenue profile and prioritizing investments that support future technology margin expansion and technology revenue growth. Our adjusted net income per share in the fourth quarter and full year of 2025 was $0.08 and $0.19, respectively.

The weighted average number of shares used in calculating adjusted basic net income per share in the fourth quarter and full year of 2025 was approximately 71 million and 69.9 million shares, respectively.

Turning to the balance sheet. We ended the year with approximately $96 million of cash, cash equivalents and short-term investments and $161 million of term loan debt outstanding. For Q1 2026, we currently expect total revenue of $68 million to $70 million and adjusted EBITDA of $7 million to $8 million. As we enter 2026, we continue to manage the business with a focus on operational efficiency while balancing targeted investments to support disciplined growth and retention initiatives that we expect will benefit results in the future. We have invested in migration-related personnel and contractors and are adding R&D investments in AI and India.

While these investments may create near-term financial pressure, we believe they position the business for cost structure improvement in the second half of the year and beyond. Our Q1 2026 revenue is expected to decrease compared to Q4 2025 due to 3 primary drivers. First, we expect a reduction in TEMS-related revenue due to downselling and our further exit from certain lower-margin TEMS arrangements. This contributed approximately $2 million of the decrease.

Second, we continue to see pressure associated with the DOS to Ignite migration. We expect revenue to decline by about $1.5 million in Q1 2026 compared to Q4 2025 related to data platform pressure. Third, we expect an approximately $1.5 million decrease in nonrecurring revenue in Q1 2026 compared to Q4 2025. This is primarily driven by timing of project completions or certain renewals. As a reminder, our project-based nonrecurring revenue can fluctuate quarter-to-quarter. We've made substantial progress in migrating our DOS clients to Ignite, but as discussed on previous earnings calls, we do still have work ahead. Across 2026 and 2027, we've been notified of roughly $12.5 million in DOS-related ARR downsell and churn. In addition, we currently estimate $52 million in DOS-related ARR that may be subject to negotiation in 2026 and 2027, of which $35 million is estimated to be data platform infrastructure ARR.

Data platform infrastructure or the data warehouse and related infrastructure is where we're seeing the highest degree of pressure. While we do expect some level of further churn of this ARR, as Ben mentioned, we are putting plans in place that are designed to retain a large part of this balance.

After 2027, we'd expect to generally be through the data platform infrastructure migration headwind. We have maintained strong application relationships with our clients even when data platform infrastructure downselling occurs and don't generally lose enterprise relationships entirely. We expect our success in maintaining application relationships to continue in the future.

As we approach 2026, although full year guidance is not being provided, we anticipate that several prevailing trends will persist. These include a sustained emphasis on technology-led bookings through a sharper commercial approach and an ongoing focus on improving technology ARR retention through operational excellence and differentiated applications. With that, I'll turn the call back to Ben.

Thanks, Jason. In closing, I want to thank our clients for their continued partnership and our team members for their commitment during a year of meaningful progress and transition. We are focused, disciplined and aligned around the areas that matter most, and we are committed to clear and understandable communication as we move forward. We look forward to updating you on our progress in the quarters ahead. Operator, we're now ready to take questions.

[Operator Instructions] Our first question is coming from Stan Berenshteyn with Wells Fargo.

I guess if it's one question. I'd like to maybe ask about the comments you made around the strategic review in the prepared remarks. Does that include the possibility of selling the company?

Thanks, Stan, for the question. Appreciate it. We are really focused on how we best position our company for long-term success. And so as we've done this strategic analysis, we're turning over every rock and looking at the company and looking at where -- how we can best position the company for shareholder value.

We see tremendous opportunity ahead and some of the things that we do related to helping better manage costs for our clients as they're really in a challenging market right now, helping drive that consumer experience. And of course, the foundation for Health Catalyst is the clinical quality work that we do. And the ability to do that all together and one is a really huge differentiator for us as an organization. So we are really doing this assessment to best position ourselves for success and align to create shareholder value.

So is that a yes or is that a no?

Appreciate the question. We're just in an assessment, but I've been 1 month into the role and really just driving value is what we're after.

We'll go next to Richard Close with Canaccord Genuity.

Jason, maybe if you could go over the transition impact, I guess, with respect to the first quarter and that I think you said $52 million in terms of the data platform for the remainder of the year. It went by pretty quickly. So if you could just go over that again and then maybe provide a little bit more details on exactly what is going on there.

Yes. Yes, I'd be happy to. I appreciate the question, Richard. So yes, I definitely wanted to provide a bit more commentary related to the DOS to Ignite migration that's taking place. I did mention the $52 million. That would be our DOS-related revenue, which would encompass both integrated applications as well as data platform infrastructure.

And really, of the 2 components there, it's the data platform infrastructure where we're seeing the highest degree of pressure related to this migration. This would be the hosting side of the DOS platform. And that's where we have $35 million of data platform infrastructure ARR that we're working with our clients on plans to retain moving forward. And so that's where we do expect to see the pressure across 2026 and 2027.

And is it something where they're choosing another platform or a competitor? Or what exactly I guess, are you negotiating with them there on that?

Richard, it's Ben. Yes, the data platform infrastructure level, there are cross-industry technology solutions that come in and can enable them depending on their strategy. But they still need from us and that when they do that is the expertise and the IP and the applications that we provide on top of that. So it's all part of our strategy to meet them where they are depending on what they're going to do from a data platform infrastructure approach.

And we'll go next to Jeff Garro with Stephens.

I want to hit on the demand environment as what you learned in Q4 around bookings and specifically, booking size and scope deal length -- or sorry, on the sales cycle length of the sales cycle and app attach rates for deals that landed in Q4? And if you could help translate that into expectations for bookings or just demand generally in 2026. That would be helpful as well.

Sure. Thanks. In Q4, we did a strategic assessment to look at how our applications and solutions best resonate in the market. And it came back clear that the market is in great need of the ability to better manage their costs to drive clinical quality and to engage and attract new consumers to their organizations. That's because they're under more pressure than ever. I mean the profitability pockets are eroding for our provider clients.

They are -- the payer mix is changing with more Medicare patients coming in. the commercial payments aren't rising at the rate. So they really have to be focused on how they're managing their labor costs and their clinical costs. They have to be focused on not eroding clinical quality when they're doing that, and they have to win in the consumer side. So we see activity in those areas, in particular, on the cost and labor side and continually the clinical quality side. So that's where we see the greatest impact and opportunity, and that's representative in the funnel as well.

Our next question comes from Elizabeth Anderson with Evercore.

I think you guys talked a little bit about your sharper commercial alignment going forward. Can you talk about when you're going out and you're talking to clients? Where do you see it as you're sort of like right to win with the current portfolio that you have?

Thanks. I'll just expand on the prior question because I think that is really where we're strong. The market is in real need of better managing their costs and driving clinical quality. And when you are driving -- managing costs, you can't do that at the expense of your clinical quality in health care. And I think the market is -- this is really early for the market because the cost pressures they're under are growing and are very significant. And so as our right to win is we have 15 years in this industry, we've done thousands of projects. We have tremendous content and intellectual property to enable our AI to help guide our clients through change management to navigate these really rough waters. So it's -- the challenge for us is we have not done a good job of telling that story.

We're bringing in a Chief Marketing Officer. We've done the strategic assessment. We're turning over every rock. We're talking to our clients. We're talking to partners. We're talking to industry leaders. And the reality is this is a huge need, and it's something that's going to grow and we believe, going forward. And so that's where we're leaning in, and that's where you're going to see our story evolve over time. So the market really understands what Health Catalyst is all about.

We'll go next to David Larsen with BTIG.

This is Jenny Shen on for Dave. I think you highlighted how despite some of the retention declining to sub-100% levels, you generally maintain and retain most of your clients, especially your enterprise ones. Can you kind of just give us a split? Is it like 50-50 between customers actually rolling off completely or just down selling, just getting a dynamic between the difference between roll-offs and down sells?

Yes, I appreciate the question, Jenny. It's definitely a much lower percentage that you mentioned. It is -- we don't generally lose enterprise relationships. So where we are seeing the pressure, like I mentioned in the prepared remarks, is on the data platform infrastructure side. And that's where we could see down selling related to that. But typically, from an application relationship standpoint, including those integrated applications, we generally see that clients are electing to keep those applications for the future.

Next question comes from Jessica Tassan with Piper Sandler.

Ben. I was hoping maybe -- I appreciate the comments on cost and clinical quality as being sources of pipeline strength. But I guess what specifically are the names of the Health Catalyst apps that fit into those categories? And what do they do? And then can you just talk about how the data platform disintermediation could potentially dilute the value of the applications or at least commoditize the application layer and what you are doing to protect against that possibility?

Jessica, nice to meet you as well. As we break down our applications across those 3 categories, that we talk about. We have applications that deal with clinical cost intelligence, which would really focus more on some of the clinical services and some of the supply chain stuff they're doing within the organization to operationalize and make them most efficient in terms of the procedures that they're doing and being as effective as possible. But when they're making the choices, making sure that clinical quality stays high or even grows. You're looking at the labor side, we have something called power labor that also fits within the labor -- within the cost management side of the equation and the ability to do both at once for an organization is incredibly powerful as well. As you look at the clinical side, there are applications around measures. There are applications that are supporting ambulatory strategy in today's world.

If you don't have a great ambulatory strategy, it's going to be very challenging to execute and grow with your access. So that blends into the consumer side where we have a tremendous consumer intelligence applications as well. So we could spend a lot more time on each of those, and I'd be happy to talk about those at length, but there are applications that support each bucket going forward.

And I want to just reiterate one thing though, the benefit is, of course, we can go deep on any one of those applications. So this goes back to meet you where you are. If someone has a challenge and they're using a lot of visiting nurse labor that can be incredibly expensive. We're not staffing their OR times effectively or efficiently, things like that, we can really help them become more efficient. But again, all with that clinical foundation as an organization, how are you making these changes? How are you solving these problems while not disrupting your clinical quality. In fact, you're improving your clinical quality. And that's just the core of Health Catalyst.

And we'll take our next question from Sarah James with Cantor Fitzgerald.

How should we think about the durability of margins if revenue days under pressure for another few quarters? And can you help us the orders of magnitude of the levers that are under your control for 2026?

Yes. I appreciate the question. Yes, as we think about gross margins moving forward, there is pressure associated with the DOS to Ignite migration from a technology margin standpoint, that would mostly be the duplicate hosting costs, the duplicate cost structure that we do put in place. We're working to optimize there and remove those costs as quickly as possible, but that does have an impact on Q1 2026. And then from a professional services adjusted gross margin standpoint, we do see pressure associated with the migration personnel that we're adding to assist with the migration.

That is to move these migrations as quickly as possible as well. But that is a near-term impact that is impacting Q1 2026 as well. But once we're through the migration, we do expect these to be costs that would be removed from our books moving forward, but we'll see the impact in 2026 and a bit of that impact as well as we move into 2027 and continue the migration initiative.

Got it. And just to take a step back on that, does that mean that 2026 would be your transition year returning to growth in '27? Or is there still a path to positive year-year growth for '26?

Still evaluating. We're not in a position to guide to -- and we'll be providing the 2026 guide on our next earnings call at the latest, but yes, not in a position to comment on the 2027 growth expectation at this point.

We'll go next to Daniel Grosslight with Citigroup.

Jason, I want to go back to the comments you made around the $12.5 million DOS-related ARR churn impacting '26 to '27 and then that additional $52 million at risk. Can you just break down for us how much of that combined $65 million that's at risk will impact 2026 and the quarterly cadence of those impacts? And then of the $52 million of ARR subject to negotiation now. What is the realistic success rate you're committing for these negotiations?

Yes. I appreciate the question. Daniel, as we look at the $12.5 million, I guess, starting there, that is DOS-related ARR where we've been notified that the client is looking to downsell or churn related to that. We expect about 75% of that to impact 2026 at different points throughout 2026. More of that will come on probably around midyear and going into the later half of 2026. And around the $52 million, that would be DOS-related ARR, which does include the integrated applications and the data infrastructure as well.

And that's where the $35 million would just be the piece associated with the data infrastructure. And we're working with those clients on negotiation on migrating those clients to Ignite. I mean we do expect to continue to see pressure associated with the migration, and that's where we do expect to see some downselling related to the data platform infrastructure, but would expect to be able to retain those application relationships with the clients. So we're working on a plan with the individual clients, but we'll provide more on that, Daniel, as we provide our full year 2026 guide.

And we'll go next to Richard Close with Canaccord Genuity.

I'm just curious on any of the acquisitions that you've done since in a public company. I know Vitalware has been a pretty strong contributor. But can you talk about like any of the other acquisitions that you've really seen decent growth in that app layer and which ones, I guess, this has been at, but which ones really fit into these 3 priorities now?

Thanks, Richard. This is all part of the assessment in terms of how these applications align to the priorities as we head forward and where can we drive the most shareholder value, the most client value and the most growth for the organization. Ultimately, we're all about driving measurable improvement. And that measurable improvement comes in those 3 areas that we talk about. So most of our applications align to those areas, and we see opportunities across. And so we just have to figure out through this assessment, which ones are going to create the most value for us going forward, and we're super excited to do that. And we'll be able to come back with much more clarity at our -- no later than our next earnings call when we provide guidance and with a little more thoughts on that assessment.

At this time, there are no further questions in queue. I will now turn the meeting back to Ben Albert for any additional or closing remarks.

Thank you, everyone. We really appreciate you joining today. We look forward to the next call where we'll be able to provide guidance and more results from this assessment. .

Thank you. This concludes today's Health Catalyst 2025 earnings conference call. Please disconnect your line at this time, and have a wonderful day.

Welcome to the Health Catalyst Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Hopper, Senior Vice President of Finance and Head of Investor Relations.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the third quarter of 2025, which ended on September 30, 2025. My name is Matt Hopper, Senior Vice President of Finance and Head of Investor Relations. With me today are Dan Burton, our Chief Executive Officer; Ben Albert, our President and Chief Operating Officer; and Jason Alger, our Chief Financial Officer.

A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K 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 Q4 and fiscal year 2025.

Growth trends, targets and expectations beyond 2025, our public market value, our CEO transition, our ability to attract new clients and retain and expand our relationships with existing clients, our growth strategies, the impact of 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 the 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 third quarter 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 information 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 the third quarter of 2025 and 2024 to their most comparable GAAP measures is provided in our press release. With that, I will turn the call over to Dan Burton. Dan?

Thank you, Matt, and thank you to everyone who has joined us this afternoon. We are pleased to share our Q3 2025 financial results including total revenue of $76.3 million and adjusted EBITDA of $12 million, exceeding our guidance on each metric. Additionally, we are encouraged with the results of our Technology segment, which recorded revenue of $52.1 million, representing 7% year-over-year growth. Adjusted gross margin was 53%, an increase of approximately 510 basis points year-over-year.

I will now share some perspectives on our anticipated 2025 bookings levels, which aligns with what we shared a few months ago. We continue to expect approximately 30 net new platform client additions for 2025. As a reminder, Q4 is often a very active quarter in terms of bookings and contract renewals. We also continue to expect our average booking size for net new platform clients in 2025 to be towards the lower end of the $300,000 to $700,000 range previously provided.

Also, as we communicated last quarter, we reaffirm our expectation that dollar-based retention for 2025 will be in the low 90s. We are also reaffirming our previous full year guidance for revenue of $310 million and for adjusted EBITDA of $41 million. The market continues to be dynamic, but by focusing on solutions with proven ROI and by consistently meeting client needs, we have maintained a strong pipeline. We remain focused and disciplined in our operations and are committed to delivering meaningful results.

Next, we'll hear an operational update from Ben Albert, our recently appointed President and Chief Operating Officer. Ben joined Health Catalyst through the acquisition of Upfront Healthcare Services earlier this year. With over 25 years of experience in building and leading health care organizations, Ben has consistently delivered compelling value propositions, successfully activating patients while enhancing clinical, financial and operational outcomes.

Since September 10, Ben has provided crucial day-to-day leadership at Health Catalyst, overseeing operations in product engineering, technology delivery and support, growth, operations, finance and corporate strategy. I have partnered closely with Ben over these last few months and have found his experience, insights, operational focus, commitment and mission-driven leadership to be effective and energizing. I look forward to our continued work together in support of Health Catalyst's mission and strategy. Ben?

Thank you, Dan. I appreciate the opportunity to share updates on several areas that are central to our strategy and operational progress. Over the past quarter, we have continued to strengthen our leadership team to support our long-term vision and improve performance. Recent appointments include Robbie Hughes as Chief Product Officer; Christine as Chief Engineering Officer; Ryan Barry as Chief Client Services Officer; and Shounak Lahiri as SVP of Global Solutions.

These changes reflect our commitment to building an agile, high-performing organization that is well positioned to execute on our 2026 strategy and deliver value to our clients and shareholders. Our solutions are delivering measurable results where health systems need the most, cost control and operational efficiency. With ongoing financial and workforce pressures, our solutions help organizations streamline operations, reduce spend and sustain performance.

Temple University Health System used PowerCosting and Pop Analyzer to achieve $7.5 million in savings through better charge capture, faster collections and lower medication costs. INTEGRIS Health leveraged our PowerLabor offering to save $30 million in labor costs by reducing contingent staff and improving cost per discharge, all while maintaining high standards of care. These results highlight how we're directly addressing the market's most urgent needs and delivering real quantifiable value.

We've tailored our solutions to align with today's environment, positioning us as a strong partner for clients navigating this period of change. We're making progress on our Ignite migration initiatives, remaining on track for approximately 2/3 of our DOS clients to migrate by the end of 2025. As Dan mentioned, we're experiencing dollar-based retention pressure in 2025 due to the ongoing migration efforts. We expect to go into 2026 with similar pressure.

While we anticipate making meaningful progress on our Ignite migrations by the end of the first half of 2026, we've adjusted our time line and approach to be more client-centric, recognizing that some organizations prefer to remain on DOS for the near and medium term. We are committed to providing more flexibility and meeting clients where they are, and we expect this approach will improve client experience and dollar-based retention. Dan?

Thank you for that update, Ben. I want to take a moment to reflect on our recent experience at the Health Catalyst Analytics Summit, or HAS, which continues to be a valuable opportunity for us to engage with hundreds of attendees, including our clients, partners, investors, analysts and thought leaders. The energy and insights from HAS reinforced our commitment to client-focused innovation and measurable improvement as we move forward. Turning to our outlook for 2026.

We are currently in the early stages of our annual planning process, and we look forward to sharing more specific details and updated expectations during our next earnings call. Based on current trends, we anticipate revenue performance to be a few points lower in 2026 relative to 2025, driven by factors in 2025, such as dollar-based retention rate in the low 90s, a lower net new client count, Ignite migration headwinds and exiting or restructuring a few less profitable TEMS relationships.

At the same time, we expect to see improvement in adjusted EBITDA, reflecting our ongoing efforts to strategically focus the organization, manage costs, make targeted investments and optimize our migrations. We will be balancing growth, revenue mix and free cash flow progression. We are taking a measured approach to setting expectations, and we will continue to provide updates as we navigate the evolving market landscape. Next, as we continue to focus on disciplined capital allocation, we reiterate our commitment to realizing a strong return on our acquisition investments.

We feel confident in our current differentiated applications portfolio, and we do not anticipate pursuing additional acquisitions in the near to medium term. Our priority is driving growth, profitability and shareholder return from our existing capabilities and recently acquired assets. With that, I'll turn the call over to Jason to provide a detailed review of our financial results and guidance. Jason?

Thank you, Dan. For the third quarter of 2025, we generated $76.3 million in total revenue. This total represents an outperformance relative to our quarterly guidance and represents flat results year-over-year. Technology revenue for the third quarter of 2025 was $52.1 million, representing a 7% increase year-over-year. This year-over-year growth was primarily driven by recurring revenue from new and acquired clients. Professional services revenue for Q3 2025 was $24.3 million, a 12% decline compared to Q3 2024, primarily driven by the exit of our less profitable pilot ambulatory operations, TEMS contracts.

I'd also note that Q3 2025 technology and professional services revenue did include nonrecurring items that are not anticipated in Q4 2025. For the third quarter of 2025, total adjusted gross margin was 53%, representing an increase of approximately 510 basis points year-over-year and up approximately 310 basis points compared to Q2 2025. In the Technology segment, our Q3 2025 adjusted technology gross margin was 68%, an increase of approximately 330 basis points compared to the same period last year and generally in line with previously shared expectations of 1 to 2 points of margin improvement quarter-over-quarter.

In the Professional Services segment, our Q3 2025 adjusted Professional Services gross margin was 19%, representing an increase of approximately 210 basis points year-over-year and an increase of approximately 70 basis points relative to Q2 2025. This quarterly performance was ahead of previously shared expectations and was mainly driven by our reduction in force that occurred in mid-Q3 2025 as well as some project-based revenue that was recognized in Q3 2025. In Q3 2025, adjusted total operating expenses were $28.1 million.

As a percentage of revenue, adjusted total operating expenses were 37% of revenue, which compares favorably to 38% in Q3 2024. Adjusted EBITDA for Q3 2025 was $12 million, exceeding our Q3 guidance of approximately $10.5 million and up 64% compared to Q3 2024. Our adjusted net income per share in Q3 2025 was $0.06. The weighted average number of shares used in calculating adjusted basic net income per share in Q3 was approximately 70.4 million shares. Turning to the balance sheet.

We ended Q3 2025 with $92 million of cash, cash equivalents and short-term investments compared to $392 million as of year-end 2024. In terms of liabilities, the face value of our term loan is $161 million. As we shared on our May call, on April 14, 2025, we paid off the $230 million convertible notes in full at maturity with cash from the balance sheet. As it relates to our financial guidance, we would highlight that the following outlook is based on current market conditions and expectations and what we know today.

For the fourth quarter of 2025, we expect total revenue of approximately $73.5 million and adjusted EBITDA of approximately $13.4 million. For the full year 2025, we continue to expect total revenue of approximately $310 million, representing 1% year-over-year growth, adjusted EBITDA of approximately $41 million, representing 57% year-over-year growth. For Q4 2025, technology revenue is projected to slightly decline compared to Q3 2025, driven primarily due to migration-related downsell and churn, partially offset by application-related growth.

Q4 2025 professional services revenue is expected to be down compared to Q3 2025 due to project-based revenue in Q3 and reduced revenue due to our contractual restructuring. Our Q4 2025 revenue mix is expected to shift further toward technology, reflecting the ongoing strength of our applications portfolio. Next, in terms of our adjusted gross margin, we expect positive revenue mix improvements, along with our cost restructuring and our renegotiation of contracts to continue to manifest in favorable gross margins compared to 2024.

Our overall adjusted gross margin is expected to be -- is expected to slightly decline quarter-over-quarter with adjusted professional services gross margin holding roughly constant and adjusted technology gross margin slightly declining due primarily to duplicate hosting charges associated with the migration to Ignite and timing of certain vendor charges. We anticipate that our adjusted operating expenses will be down approximately $2 million to $3 million in Q4 2025 relative to Q3 2025 as we continue to see the positive impact of the restructuring initiatives we discussed earlier.

Looking ahead to 2026, we are focused on our plan to strategically deploy resources in a way that continues to make progress on operating leverage. The actions we're taking now, such as restructuring our professional services contracts, strategically leveraging our growing India operations and integrating AI more broadly across our organization are laying the groundwork for continued margin improvement. As we weigh our allocation of resources under our 2026 budget planning process, we are prioritizing areas that will both sustain our momentum in technology gross margin expansion and further enhance the efficiency of our R&D efforts.

We expect to realize incremental operating leverage in 2026, which will be primarily driven by our previously announced August restructuring and our ongoing optimization initiatives. We anticipate that this will provide us with greater flexibility to allocate capital towards high-impact opportunities, including further technology development and targeted market expansion for our existing offerings and new internally developed offerings. With that, I will conclude my prepared remarks. Dan?

Thanks, Jason. In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members for their continued engagement, commitment and dedication. And with that, I will turn the call back to the operator for questions.

[Operator Instructions] Our first question is coming from Jared Haase of William Blair.

Just wanted to ask on the updated commentary around the Ignite migration. I guess I'm curious, #1, just what's driving the longer time line? Should we think of that as sort of a reflection of maybe some bandwidth issues within the client base? And then I'm also curious why some clients would maybe be okay sticking with the legacy solution, just given what seems like a pretty big upgrade in terms of the new technology capabilities with Ignite. And then I think you also said some clients may stand DOS for the medium term. So I'm curious what percentage of clients you're thinking should convert over by the end of 2026.

Yes. Thank you, Jared. Great questions. And I would invite Ben to maybe share a few comments and then Jason and I might add some color commentary as well. Ben?

Great. Thanks, Dan. Jared, as we've assessed and worked with our clients, we really see their desire to stand us in some cases for a little bit longer and for us to meet them where they are and provide them that level of flexibility given all the competing priorities and the fact that DOS is providing them with tremendous value today. And as we continue to move towards Ignite, we'll be there to support them as they're ready to make that transition and we continue to enhance what Ignite provides. So as we go forward, we see this as a huge opportunity for our business and also an opportunity for our clients.

Yes, I totally agree. And Jared, to a couple of your specific questions, I think we still anticipate a large majority of our clients to be migrated by that first half of 2026, as Ben mentioned in our prepared remarks. But there are a number who as they're facing lots of dynamics, lots of pressures from the Big Beautiful Bill and other dynamics that have come to us, and I appreciate Ben's leadership in recognizing the value of meeting clients where they are.

And there is a small subset that would prefer to get through some other items and stay on DOS for a period of time. And I think the introduction of more flexibility on our side is really designed to meet clients where they are, more flexibility as it relates to how clients want to migrate and even that time line for those that do want to migrate, just providing them more flexibility, we do believe will lead to some improvement in our dollar-based retention and the response so far from clients has been really positive.

Yes. And the only thing I would add, Jared, is we are still expecting to make progress on gross margin even with this change to our migration approach. We are able to dial down our DOS infrastructure and support footprint as clients do migrate over to Ignite. So we'd only expect really a slight slowing in our progress with this change of approach.

We'll take our next question from Jessica Tassan of Piper Sandler.

So we know that tech revenue was in line with your forecast, but how do we think about just the sequential decline in dollars of tech revenue as representing kind of the combination between your like low 90s dollar-based retention and then ostensibly the implementation of whatever portion of the new deals that you all booked during 2Q '25.

So I guess just if you could break out like the 3Q tech revenue between the dollar-based retention and then like the implementation of the new clients booked in the first half of '25. And then just any comments on fourth quarter tech revenue and expectations for sequential growth in tech revenue as we look to 2026 would be really helpful just as we are trying to refine our models into the end of the year.

Yes, absolutely. Thanks for the question, Jess. And I'll share a few thoughts, and then Jason, please also add. So I think as we have discussed in our last earnings call, within the tech segment, there are a couple of moving parts going in different directions. The platform part of our business is experiencing those DOS to Ignite headwinds that we've discussed previously, where Ignite is lower priced than DOS. And as we work through that process, that's a natural consequence.

At the same time, at the apps layer, we're grateful to continue to see growth in that segment. And that manifests itself both as it relates to our existing clients growing their technology revenue in the apps space with those existing clients as well as new client wins in the apps space in addition to what you referenced to as it relates to adding new platform clients. So there is a mix of a few different moving parts.

We're encouraged to see those new client additions adding to the tech revenue. We see the negative impact of some of the headwinds related to the DOS to Ignite migration process with existing clients, but then another positive as it relates to app layer growth, both with existing and new clients. So there's quite a few moving pieces that all kind of net out to the guidance that Jason provided.

Yes. I think that's well said, Dan. The only thing I would add is, as mentioned in the prepared remarks, we did have a level of nonrecurring revenue in both the technology revenue line and professional services revenue line. So that's also contributing to that decline that we're expecting in Q4.

We'll take our next question from Elizabeth Anderson of Evercore ISI.

Can you talk a little bit -- maybe just to make sure that we're all level set, help us understand sort of more specifically the value of the one-timers that you are calling out? And then two, how do we think about like given some of the concerns that some of your end market customers are having as we're going into 2026, how do you kind of see as far as you can tell right now on the pipeline and whatnot, when the company sort of returns to positive revenue growth? Are we thinking sort of mid-2026? Or you think maybe potentially a little for '27? I just want to kind of get a better sense of that as we move through the opportunities and the challenges that your customers are facing.

Yes. Thanks, Elizabeth. Jason, do you want to take that first question, then I'll comment on the second question?

Yes. Yes. On that first question, value of the onetimers. I mean, it is becoming more common in our professional services revenue line to have onetime revenue, especially as we see the shift from FTE-based arrangements to more project-based arrangements. It's less common on the technology side. I mean the technology onetime revenue is roughly in the range of $500,000 to $1 million that we saw in that Q3 technology revenue line that we're not expecting to reoccur in Q4.

Thanks, Jason. And as it relates to your questions about the pipeline and the reacceleration of our growth, our pipeline remains robust, and we're encouraged to see meaningful additions to our pipeline. I think there are some dynamics that we are watching and managing through. One of the dynamics that we've spoken to in recent discussions as well is that the deal sizes are a little bit smaller. We do think that is the result of some pressure from the Big Beautiful Bill and some of the Medicaid cuts that our clients and our end market are absorbing.

But that also has some positive impacts in that sometimes smaller deals move a little bit more quickly through the pipeline. At the same time, we've also seen some dynamics where it's harder to predict exactly what the sales cycle might look like in terms of when deals will close just because of some of the uncertainty as folks are working through their budgeting process.

But fundamentally, as we think about the strategy of reacceleration of growth, we're definitely focused on our core differentiation, which has always been our deep health care expertise and our passion for enabling clients to realize measurable improvement. And I think as 2026's strategy and plan is coming into focus. I really like where Ben and the leadership team are focusing. And Ben, maybe you could give some specific examples.

Sure. Happy to. As we look towards next year, there's a big emphasis on our unique capabilities around helping health systems manage their costs through our cost management capabilities and solutions as well as the need for ambulatory performance solutions as you think about where the market might be heading. And we have proven ROI in those areas. We see growth opportunities in those areas, and we expect to spend more time focused in 2026 on that. What the yield will be, we're still working our way through as we look at 2026, but we have a lot of optimism towards those areas where we're seeing already pipeline indications of interest.

Thanks, Ben. And we expect Elizabeth to be in a position at the next earnings call to share more specifics as it relates to how we see bookings unfolding in 2026.

Our next question is from Richard Close of Canaccord Genuity.

Maybe just a follow-up on Jess and Elizabeth's questions. Just with respect to the '26, I guess, revenue, I think you said likely a couple of points lower growth than '25, I guess, the 1% to 2% you're looking at in '25. So as we think about professional services and tech, is that the '26 mainly being driven by the tech and -- or is there more professional services contracts that you're pruning? And then I have a follow-up.

Yes. Great questions, Richard. So I'll share a few thoughts, and then please others share as well. I think when we think about the dynamics that will play into 2026, on the professional services side, we've mentioned and specifically highlighted that we made a decision to exit a couple of pilot ambulatory operations TEMS contracts. And you're already seeing some of that result in the back half of 2025. That will, of course, be a full year of results in 2026. We've also looked at, and we mentioned in our prepared remarks, a few other less profitable TEMS relationships. And we are very focused on profitability.

So in the services side, I do expect that we'll see some trimming in some of those specific relationships that will have a slightly negative impact on revenue, but also a positive impact on margins. And that's one of the contributors that led us to positive margins in Q3 that we think will be a general trend line moving forward. On the technology side, we do expect to see those headwinds that we've referenced and pressures as it relates to dollar-based retention as we work through the Ignite migration, partially offset by continued growth that we've been encouraged to see at the apps layer.

And then there's always some other factors that lead to the 2026 kind of growth equation, the building blocks around new clients, and we've shared some specific data there that can help hopefully with modeling. We've shared our dollar-based retention expectation for this year that helps model what next year's revenue might look like. And of course, there's always some in-year revenue growth as well.

Yes. The only thing I would add, Richard, is we'll provide additional commentary related to this as part of JPM and especially in our Q4 earnings call. But as we close out the year, we'll have full visibility on deals that are signed in Q4. It's a busy period for us. But one clarifier is that we did mention in the transcript that we'd be a few points lower in 2026 compared to 2025.

Yes. Okay. And then just thinking about the pause or people on the migration, and just as we think about it is, I'm curious whether you can comment on any competing priorities maybe for hospitals. And it sort of relates to the one thing we hear a lot is that hospitals want to go ahead and move forward with AI, but you really need to make sure that your data is good and the garbage, garbage in, garbage out type of thing. So I would think that Health Catalyst would be a high priority since you're so focused on data and harmonizing and whatnot. So just thoughts there on competing priorities and maybe where you guys rank in that.

Yes. It's an insightful question, Richard. And I think one of the reasons that we, as a leadership team have felt to give more clients flexibility, meet them where they are is that reality that DOS does a good job of making sure that the data is clean and organized. And for many of our clients, that's what they need. And they would prefer in a budget-constrained environment to leverage that existing capability and build some AI capabilities on top of that rather than taking investment dollars that would be required to manage a migration right now.

And meeting them where they are, giving them that flexibility to decide what is most important for us to achieve in 2026, knowing that they can achieve some meaningful things leveraging DOS, giving them that option, I think, has been something that has been warmly received. Other clients want all of the capabilities, all of the modern capabilities of Ignite. They fit into more of an early adopter or an early mover as it relates to wanting both the infrastructure and the use case layer to be cutting edge, and we want to meet them where they are.

And that's where we've seen many of our clients already migrate to Ignite. But we recognize different clients will have different priorities, different budget realities. And so providing them with flexibility, recognizing that both DOS and Ignite do a really nice job at that fundamental data cleansing and organization layer. And as such, both can be utilized for AI use cases is one of the reasons why we're providing a little bit more flexibility and more options. Anything you'd add, Ben?

Only that, Richard, you bring up a good point in that, obviously, there's a lot of focus on AI, and we have been investing there in some pretty excellent solutions. We've got a couple of things in beta around costing intelligence and ambulatory intelligence off of the data that we amass and then we've also enabled some of the advanced statistical methods that have been integrated into the core platform as well that are generally available today.

So you're right in that there is a tremendous interest there, but it's all about how do you drive the value from the AI, and that's where we're leaning in as opposed to just providing data in order for AI use cases to be leveraged. Our expertise is differentiated, and we have the ability to not only create the data environment, but also to deliver the AI that drives value for our clients.

And to Ben's point, Richard, most of the solutions that he just described, those AI-specific use case solutions can be leveraged, whether DOS as the infrastructure or Ignite as the infrastructure. And so again, we want to meet clients where they are. We want to enable them to prioritize their budget in the way that's most useful for them.

Our next question is from Daniel Grosslight of Citi.

Ben, you mentioned that you guys have a strong pipeline for products or apps that help health systems manage costs and ambulatory performance solutions. I'm curious, does your revenue model need to change at all on the tech side? That is -- do you need to build in some specific ROI guarantees where you have some sort of skin in the game if your clients aren't able to realize expected savings? Or do you think the current revenue model on the tech side is -- just doesn't need to change?

Thanks, Daniel. I think that's on the table. We provide ROI, and we've got hundreds and hundreds of use cases where we deliver tangible ROI. And if that's what the market needs and we can deliver to that, assuming the data is there, and we have the type of partnership that leads to that shared data and ROI, then we're absolutely open to those conversations going forward. It's a very astute question as it relates to where the market is going overall. Dan, did you want to add?

And just -- yes, I agree with that. And just to that point, Daniel, I think one of the dynamics that we like longer term as we shift away from DOS and towards Ignite is Ignite isn't as expensive or heavy as DOS was. And as you know, most of the ROI of our solutions exist above the platform layer at the use case layer. And as we have more to offer the apps layer and clients are able to spend more of their wallet with us at the apps layer, there's just more of an opportunity to demonstrate that tangible ROI.

And frankly, more flexibility to do what Ben described where because the apps layer is the highest gross margin segment of our business, we can take some risk. We can meet clients where they are, and we have a lot of confidence in the ability to drive those measurable improvements. So it is on the table.

We'll take our next question from David Larsen of BTIG.

Can you talk a little bit about the growth rate in Ignite customers versus DOS customers? I mean at your Summit, what I was hearing from hospital systems was, hey, if they're on DAS, they got to do the conversion before they buy more stuff. So I'm thinking to myself, maybe your Ignite base is perhaps growing a bit faster than DOS. And then just any thoughts on when we're going to get past this TEMS ambulatory services comp.

Thanks, David. Great questions, and it was good to see you at HAS as well. Thank you for your attendance. So as it relates to that first question, I think one of the important learnings that we wanted to highlight in this earnings call and a shift in our approach is really addressing that first item that you brought up that I think in the past, we had been a little too inflexible as it relates to kind of requiring our clients to move from DOS to Ignite and requiring that to be the next step before we talk about other things.

And there are some cases where certain apps are only built to work on top of Ignite. So there are some use cases that can't be done, but most use cases can be done on DOS. And I think the shift that I hope we're conveying is that recognition that it's really important to meet clients where they are. It's important to give them flexibility. And if they want to stay on DOS for a little bit longer, and that can open up conversations where we can grow with app layer, use case layer opportunities on top of DOS, we should pursue those.

And in particularly, as it relates to what we're talking about just a few minutes ago, that's where the client gets the greatest ROI, that apps layer. And so we're providing a lot more flexibility, and we do expect that, that will strengthen our growth within that part of our client base moving forward. And we expect that, that should enable all of our clients to pursue growth opportunities, especially the apps layer with us moving forward. Before we address the TEMs question, anything, Ben, that you'd add on that migration dynamic?

I would only add that Ignite is, as we've said all along, a more efficient platform. So we anticipate that to continue to be more of a catalyst for us. And as we invest more on the applications that sit on top of that, the value proposition is just getting more and more compelling every day, and we would anticipate that's where most of the movement comes in the future, yes.

And as it relates, David, to your question about what's the timing of some of those TEMS transitions and dynamics, we're through the change as it relates to our decision to exit the couple of ambulatory operations pilot TEMS contracts that occurred -- that change occurred as of June 30. As we mentioned in the prepared remarks as well as in a couple of answers to questions, we're looking across a few other TEMS contracts to make sure that we feel comfortable with the profitability progress and the profitability profile.

And where we see some opportunities to trim or change restructure, we are taking those opportunities as our first focus is on improving profitability. And you're starting to see some of the evidence of that as you see our gross profits and our EBITDA margins improving. We want to keep that trend going. So we will continue to be evaluating those through the end of this year. I think as we get into 2026, we should have a portfolio that we feel really good about and kind of get to the next chapter of growth on the TEMs and the services side as well. Anything, Jason, that you would add?

Yes, I think you covered it well, Dan. Like Dan mentioned, David, like as we hit June of next year, that's when we will lap the ambulatory TEMS exit. And so that's when we will see that difference in growth rate related to those relationships, but we'll continue to monitor any of those less profitable TEMS relationships that make sense for restructure.

Great. And just one more quick follow-up. Ben, from your perspective, 1 year from now, 3 years from now, 5 years from now, what would you like to see manifest? I mean, Dan and his team have built a fantastic asset with respect to technology over the past, call it, 5 or 10 years. What do you think needs to get done to unleash this value here from your perspective?

Thank you. There is a tremendous opportunity for this business as I look, and I want to just echo the sentiment that what has been built here is an excellent foundation, the health care expertise that this company has, the technology underpinnings, the applications that are a very diverse set of applications that deliver tangible ROI. I think it's largely about execution, how we bring these things together as efficiently and effectively to meet today's market need is a critical element as we head into 2026.

I don't see why at some point in the future, we can't return to growth as an organization and actually go more on offense as we head through the strategic part of 2026, and we evaluate what we're going to do next year. We have to overcome some of the dollar-based retention issues that we've talked about, understanding a more flexible meet your clients where you are in the market and then enable ourselves to efficiently drive growth throughout the organization. So I can't see why in the next few years, we don't achieve that given all that we have as assets today and how we bring it all together.

[Operator Instructions] We'll take a question from Stan Berenshteyn of Wells Fargo.

First, a quick clarification regarding the Ignite migration being a bit more drawn out than you expected initially. So for the clients that are staying on DOS, are they also maintaining their contractual agreements? Or are those being renegotiated even though they are staying on the DOS platform for now?

Yes. In the vast majority of cases, we're just continuing the existing contractual relationship that we have with them and extending -- giving them the time that they would like to be able to just remain on DOS, continue to utilize DOS really under the same terms. That's the vast majority of cases is what clients are asking for and where we can meet them where they are with, what they need.

Got it. And then maybe a quick one on margins. So if we think about the puts and takes related to revenue, cost cuts, efficiencies, migration issues, how comfortable are you in the 4Q EBITDA acting as a glide path as we think about 2026?

Yes, it's a great question, Stan. I'll share a few thoughts, and then Jason, please add anything as well. So we are encouraged, Stan, to see meaningful progress as it relates to our EBITDA growth, our adjusted EBITDA growth. We're excited to have reaffirmed our full year guidance of $41 million of EBITDA for 2025, which represents 57% year-over-year growth. As we shared in the prepared remarks, we do expect further growth in EBITDA.

And in some ways, Q4 can be a very useful guide as it relates to what we might be looking like moving into 2026. In other ways, there are always puts and takes as well. So there are some onetime items that contribute to Q4 that are specific to 1 quarter. And there are also some costs that we'll incur in 2026 as we move into that process in that calendar year. And we are just in the early stages of the planning process right now. So we'll have a lot more to share at the next earnings call. Jason, what would you add?

I think Dan covered it well.

Our next question is from Jeff Garro of Stephens.

I want to follow up on EBITDA growth in 2026. And first, clearly, a strong effort to manage costs over the last year. Then you had a call out of some areas of strategic focus and investments. So I want to see if there's anything else you want to add there. And in particular, we heard the mention of potential targeted market expansion. So I would love some more color on areas where you're considering expanding.

Yes, I'll share a thought or 2, and then Ben and Jason, please add as well. So we are early in the planning process for 2026. But as Ben alluded to a couple of minutes ago, we see some specific use case areas where clients really need those solutions. And he mentioned a couple in the cost management space, PowerCosting, PowerLabor, in the rev cycle space with Vitalware and some specific ambulatory offerings where we're seeing a lot of client demand and a lot of opportunity to leverage new capabilities, new technologies, AI capabilities to accelerate the ROI that a client can achieve.

So we want to make sure as we go through the planning process that we're investing in those areas to maintain that differentiation and really strengthen and accelerate that ROI. At the same time, we continue to see leverage opportunities, and Jason mentioned a few of these in his prepared remarks where we see meaningful efficiencies coming through the increased adoption inside of Health Catalyst of AI, the increased utilization of our growing India operations and a few other leverage opportunities that we believe will continue to manifest in 2026 that can allow us to do both, can allow us to make some targeted investments to help us be differentiated.

And as Ben described that return to growth, I think that product leadership and differentiation is a core part of that while also continuing a really positive trajectory as it relates to profitability. We know how important that is as it relates to providing a shareholder return. Anything, Jason or Ben, you would add?

Yes. The only thing I would add is we will provide additional precision related to those areas of investment as part of our Q4 earnings call in early 2026.

We'll move next to Sarah James of Cantor Fitzgerald.

This is Gabie on for Sara. I wanted to double-click again on the EBITDA growth for '26. Last quarter, we had a discussion around $60 million being an appropriate run rate and the commentary today is up year-over-year. Can you talk about what new costs you've baked in to maybe change the tone on commentary? And then also, if you could just highlight which apps products are the most sought after in your 4Q conversations, that would be very helpful.

Thanks, Gabie. Yes, I'll share a few thoughts, and then Jason and Ben, please add. As it relates to the way we think about EBITDA growth, one of the updates from last quarter is our Q3 actual adjusted EBITDA came in well ahead of what we were projecting. And there were some items that we were able to accelerate into Q3 that we thought might take until Q4 to really realize. And so we did maintain the same guidance that we had shared last quarter as it relates to the full year, but we did outperform in Q3 by $1.5 million.

And so there is some rebalancing embedded in that Q4 guide that we shared. And I think we are still confident and excited about the EBITDA progression that we believe is doable and possible in 2026. But we also recognize we're early in the planning process. This is a dynamic environment. We see some real opportunity to invest and enable a reacceleration in growth. And so we want to go through a robust planning process.

And we're still absolutely committed to that meaningful goal of significant EBITDA progress, and we're pleased to have been on that journey for some time now of really meaningful EBITDA progress every year for several years, and we think that will continue. We just want the benefit of the planning process to really inform where we should make some targeted investments so that we can see a reacceleration of growth and then where we can realize further leverage and allow that to drop to the bottom line with regards to EBITDA progression. Anything you would add?

Just add that, as you mentioned in terms of the where we see opportunities within applications in this cost-constrained environment, I think as we indicated earlier that we have real ambulatory intelligence solutions. And as organizations are looking for site of care optimization, they're looking to figure out how to best leverage their assets that they have, we can really help them drive that where they're looking to contain their costs. We have solutions to support cost management.

We've got this great Ignite clinical intelligence solution that can drive real reduction in clinical variance. So lots of areas and pockets of value. And back to the earlier question, that's where we just have to focus and prioritize our efforts in 2026, which we'll be excited to come back once we've done that work to explain how we're going to do that next year.

[Operator Instructions] We have a follow-up from Richard Close of Canaccord Genuity.

Yes. Just 2 quick ones. The one-timers, the $500,000 to $1 million in tech, what specifically was that? And then the second question is, are you guys seeing any business come through the Microsoft relationship for those lower level, I guess, sub-$100,000 deals. Any success there to point to?

Great. Jason, do you want to take the first one?

Yes. Yes. On those one-timers, Richard, those can be either related to pharma deals where it's a quick delivery or it can occasionally be related to timing of like a renewal being signed where we're providing the service over time but need the contractual paper to be signed. So there's a bit of a catch-up in certain situations like that, that can impact technology revenue. Regarding the Microsoft-related revenue, I'd say we're still early in that relationship. It's something that we continue to monitor how those online sales go. Dan, anything you'd add.

Yes. Just that we're encouraged to have another venue, another opportunity through partnerships like the one with Microsoft. We also have a robust partnership with Databricks that enables us to reach different audiences at a different price point, to your point, Richard. And Ben had mentioned some of the mid-market opportunities that we're starting to see where we can meet clients where they need to be from a budget perspective, and we can often do that through a partnership with Microsoft or a partnership with Databricks and Microsoft and provide real value to them at a price point that they can afford. And so we're encouraged. But to Jason's point, we're early there.

And there are no further questions at this time. I'd like to turn the call back over to Dan Burton for closing remarks.

Thank you all for your continued interest in Health Catalyst, and we look forward to staying in touch.

Thank you. This concludes today's Health Catalyst Third Quarter 2025 Earnings Conference Call. Please disconnect your line at this time and have a wonderful day.

Welcome to the Health Catalyst Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jack Knight, Vice President of Investor Relations.

Good afternoon, and welcome to Health Catalyst's Earnings Conference Call for the second quarter of 2025, which ended on June 30, 2025. My name is Jack Knight. I'm 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 LeSueur, 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 8-K 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 Burton. Dan?

Thank you, Jack, and thank you to everyone who has joined us this afternoon. We are 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 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 in 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 4 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 5 points of 2025 revenue growth, is an increasing frequency with which our existing platform clients are choosing to pocket the savings associated with their Ignite 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 client 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 2-part dynamic of platform clients pocketing the Ignite migration savings and the recent trend of platform clients signing fewer and smaller expansion contracts 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 2 relationships we have not maintained, 1 of these was related to a client bankruptcy event. The second major factor in reducing the 2025 revenue forecast, which represents approximately 2 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 3 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 30, 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 nonrecurring contracts but higher client profitability. The third contributor to the lowered 2025 revenue, which represents approximately 1 point of 2025 revenue growth has come from our Carevive business performance, primarily in the life sciences end market 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 lower 2025 revenue, which represents less than 1 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 $300,000 to $700,000 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 5 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 build, 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 our near-term and midterm 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 in 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 multiyear 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 was 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 a 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 30. 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 streamlined 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 11. 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 rightsize 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 rightsize 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 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 full 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 2 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 0 base salary, 0 bonus and 0 equity compensation from July 1, 2022, through December 31, 2023.

It is also important to note that I continue to be 1 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 3 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 such 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 creation. 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 LeSueur for an Ignite migration update.

Thank you, Dan. We continue to make steady progress on our Ignite migration efforts and remain on track with our previously shared time lines. As a reminder, Ignite carries a more modular and cost-efficient structure, typically more than 20% lower cost than DOS, which has in an increasing number of recent cases given funding cuts, prompted clients to reduce overall spend as part of their migration and pocket the Ignite cost savings. While this dynamic creates a near-term revenue headwind, especially in a financially constrained environment, it reflects the flexibility and ROI of Ignite and we are grateful to be maintaining strong client relationships across our migrations.

We continue to actively pursue cross-sell opportunities with platform clients and believe that over time, there is an opportunity for application expansion to offset much of the initial spend reduction. As we move past the bulk of these migrations, we expect the related headwind to diminish after mid-2026, positioning us well for more consistent growth in our Technology segment.

Thank you for that update, Dan. Next, as we continue to focus on disciplined capital allocation. we remain committed to realizing a strong return on recent acquisition investments. We feel confident in our current differentiated applications portfolio. and we do not anticipate pursuing additional acquisitions in the near to medium term. Our priority is on driving profitability from our existing capabilities and recently acquired assets. At the end of this month, we're excited to host our 11th Health Catalyst Analytics Summit or HAS in Salt Lake City. .

The event will be more deeply focused on strengthening our existing client relationships and will bring together hundreds of participants, including clients, industry experts, analysts, investors, and Health Catalyst team members for multiple days of discussion, AI and technology showcases and thought leadership, highlighting the depth and breadth of our solutions. We are also pleased to announce that effective as of September 1, we will welcome a new Director, Justin Spencer, to the Health Catalyst Board and Audit Committee. Justin brings a wealth of relevant experience, including several years as a public company CFO in the healthcare technology space as the long-time CFO of Vocera Communications.

Vocera Communications was a publicly traded health care technology company that provided digital communication and workflow technology for hospitals prior to its acquisition by Stryker in early 2022 for approximately $3 billion. We are grateful to benefit from Justin's experience and believe he will contribute greatly to the governance of the company moving forward. Before turning the call over to Jason, as was mentioned in our press release, today, we are announcing that I plan to retire from the CEO role at Health Catalyst effective June 30, 2026. By then, I will have been a leading Health Catalyst full-time for 15 years. It has been the highlight of my career to serve in this role in a company filled with teammates I love in service of a mission that I believe in, in support of clients who are so deeply committed to that same mission and with the backing of our shareholders, past and present, who have enabled us to pursue this mission to make healthcare measurably better.

For many years, my wife, Sarah and I have planned to pursue mission-oriented service opportunities associated with our faith, and we look forward to having more time to devote to this service. after I complete my tenure as CEO. I will support the Board and its CEO search process and will continue to serve on the board. Likewise, during this transitionary period, I remain deeply committed to strong execution every day in support of accomplishing our company's goals and objectives, including driving client and shareholder value. With that, let me turn the call over to Jason. Jason?

Thank you, Dan. We are so grateful for your years of dedicated service to our team members, clients and shareholders. I look forward to continuing to work with you during this transition period. For the second quarter of 2025, we generated $80.7 million in total revenue. This total represents an outperformance relative to our quarterly guidance and is an increase of 6% year-over-year. Technology revenue for the second quarter of 2025 was $52.9 million, representing an 11% increase year-over-year. This year-over-year growth was primarily driven by recurring revenue from new and acquired clients. .

Professional services revenue for Q2 2025 was $27.8 million, a 1% decline compared to Q2 2024. For the second quarter of 2025, total adjusted gross margin was 50%, representing a decrease of approximately 30 basis points year-over-year and up approximately 30 basis points compared to Q1 2025. In the Technology segment, our Q2 2025 adjusted technology gross margin was 66%, a decrease of approximately 140 basis points relative to the same period last year and generally in line with previously shared expectations of flat to slightly down margins quarter-over-quarter, primarily driven by platform migration related costs.

In the Professional Services segment, our Q2 2025 adjusted professional services gross margin was 18%, representing a decrease of approximately 190 basis points year-over-year and an increase of approximately 250 basis points relative to Q1 2025. This quarterly performance was ahead of previously shared expectations and was mainly driven by our reduction in force that occurred in mid-Q1 2025 as well as some onetime project-based revenue that was recognized in Q2. In Q2 2025, adjusted total operating expenses were $30.6 million. As a percentage of revenue, adjusted total operating expenses were 38% of revenue which compares favorably to 40% in Q2 2024.

Adjusted EBITDA for Q2 2025 was $9.3 million, exceeding our Q2 guidance of approximately $8 million and representing the highest adjusted EBITDA of any quarter in the company's history. Our adjusted net income per share in Q2 2025 was $0.04, the weighted average number of shares used in calculating adjusted basic net income per share in Q2 was approximately 69.6 million shares. Turning to the balance sheet. We ended Q2 2025 with $97 million of cash, cash equivalents and short-term investments compared to $392 million as of year-end 2024. In terms of liabilities, the face value of our term loan is $162 million.

As we shared on our May call, we paid off the $230 million convertible notes in full at maturity with cash from the balance sheet on April 14, 2025. As it relates to our financial guidance, we would highlight that the following outlook is based on current market conditions and expectations and what we know today. For the third quarter of 2025, we expect total revenue of approximately $75 million and adjusted EBITDA of approximately $10.5 million. And for the full year 2025, we expect total revenue of approximately $310 million and we continue to expect adjusted EBITDA of approximately $41 million, even with the reduction to our 2025 revenue guidance.

Now let me provide a few additional details related to our 2025 guidance. First, as it relates to our Q3 2025 expectations, we anticipate that our technology revenue segment will be flat to slightly down sequentially, but up by high-single digits year-over-year, with the applications component of technology revenue driving overall technology revenue growth and platform revenue being slightly down, primarily related to clients pocketing the Ignite migration savings in this difficult macro environment.

For our Professional Services segment, we anticipate Q3 revenue will be down sequentially and year-over-year, primarily driven by our decision to restructure and in some cases, end some services contracts, including the decision to exit pilot ambulatory operations TEMs contracts which ended on June 30, 2025. We experienced instances of delays in bookings in the first half of 2025 driven in large part by the recent funding cuts.

Next, in terms of our adjusted gross margin, we expect the positive revenue mix improvements, along with our cost restructuring and our renegotiation of contracts to begin to manifest in higher Q3 adjusted gross margins across the board. Our overall adjusted gross margin will be up a few points quarter-over-quarter with adjusted technology gross margin and adjusted professional services gross margin each up 1 to 2 points quarter-over-quarter. We also anticipate that our adjusted operating expenses will be down approximately $1 million to $2 million in Q3 2025 relative to Q2 2025 as we start to see the positive impact of the restructuring initiatives we discussed earlier.

Now let me provide a few additional details related to our full year 2025 guidance. While we are disappointed to revise our full year 2025 revenue expectations, we are encouraged that we can maintain our adjusted EBITDA guidance despite this reduction in revenue. Dan covered the 4 drivers of lower revenue growth in detail, which include clients pocketing the Ignite savings, our decision to exit and restructure a few professional services contracts, lower-than-anticipated revenue from our life sciences offering as well as our lower new client average bookings.

We believe these headwinds are driven in large part by the recent Medicaid and research funding cuts. In terms of our adjusted gross margin, we anticipate adjusted technology gross margin in the second half will be up slightly compared to the first half of 2025 and we expect adjusted technology gross margin to improve further in 2026. Next, we anticipate that our adjusted professional services gross margin will increase to approximately 20% in Q4, with further gross margin improvement expected in 2026. Also, as we see the impact of our restructuring efforts we discussed earlier, we expect continued operating leverage with adjusted OpEx declining as a percentage of revenue in 2025 compared to 2024.

We anticipate adjusted operating expenses will be down on an absolute dollar basis in the second half of 2025 compared to 2024. Importantly, we believe we can realize several points of additional operating leverage in 2026, primarily in R&D by continuing to shift our team member base to India and by pervasively leveraging AI, as we look to make accelerated progress towards improved profitability. With that, I will conclude my prepared remarks. Dan?

Thanks, Jason. In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members for their continued engagement, commitment and dedication, even in challenging macroeconomic circumstances. I would also like to thank our shareholders for their support of the company and for their willingness to help the company get to the stage of maturity, where we can focus on meaningfully improving profitability and prioritize providing our shareholders a well-deserved return on their investment. And with that, I will turn the call back to the operator for questions.

[Operator Instructions] Our first question comes from Elizabeth Anderson with Evercore ISI.

This is Joanna for Elizabeth. On your Life Science business, can you give us a bit more color on how that business is doing? And what level of investment do you think you need for that business to grow?

Absolutely. Thank you, Joanna. As we mentioned in our prepared remarks, we have seen some delays in a few late-stage opportunities related to our Carfi business specific to the life sciences space. We feel confident that our offering is differentiated and we believe there's still an opportunity to close those opportunities, but recognize that the life sciences industry is absorbing the recent research funding cuts, and that has caused some delays. We are hopeful that those delays might subside as life sciences clients adjust to a new normal, but that takes some time. And as we mentioned in our prepared remarks, based on those funding cuts and based on some of the uncertainties associated with that, we've removed that revenue from our forecast and would view the closing of those opportunities as more upside relative to our forecast. .

We'll go next to John Ransom with Raymond James.

Can you hear me?

Yes, we can. .

Great. So 2 questions for me. First of all, Yes, you look at the public hospital equities, and they kind of rallied after the bill was done. So what you're describing in the end market is a bit more dire than where the public stocks would recognize. And I know we don't have a lot of academic medical centers in the back end. And then the second question is a numbers question. If we kind of look at your forecast for 4Q and take the jumping off point, what does that imply for 2026 EBITDA kind of both total EBITDA and then EBITDA excess com?

Yes. Thank you for those 2 questions, John. I'll share a few thoughts, and then Jason, please feel free to share any additional thoughts as well. On your first question, John, I think it's an insightful question, and 1 of the things that we would share is we have a large number of clients that are in the not-for-profit space. We also have for-profit clients and some that are publicly traded, but we would skew much more towards the not-for-profit space as well as having a large representation in the academic medical center space. As I have been out visiting face-to-face with C-suite executives across many of our largest clients there isn't 1 of the C-suite executives that isn't reeling and looking for a way to plan for a new normal as Medicaid is such a large source of funding for most not-for-profit health systems. And differently, but of a similar effect, our academic medical center clients are a little bit more heavily impacted by the research funding cuts.

But those have been significant in terms of their impact for many academic medical centers. So we're seeing a pervasive negative impact. We do believe there's an element of this of just adjusting to a new normal and understanding the cuts, understanding how they will play through the P&L and the balance sheet of our clients. And as I mentioned in our prepared remarks, we're encouraged to see some recent momentum even early in Q3, where we saw some deals in the pipeline that were delayed right as the big beautiful bill was being signed into law, and we experienced those delays, but then have seen some momentum pick up.

I think our caution, John, is just a recognition that this is the largest cut in history to Medicaid. It is a huge -- a huge reduction and something that will take some time for everyone in the ecosystem to really better understand. And so we wanted to be conservative in the way that we think about what we include in our revenue forecast, allowing for there to be some time to adjust to that new normal. But we are hopeful that, that adjustment will occur. We would just move more to upside to our forecast as opposed to counting on that new normal to take place very, very quickly.

So that's on the first question. On the second question. As it relates to EBITDA, as we shared, we're grateful to be in a position because of a few positive tailwinds to reaffirm our 2025 EBITDA guidance or adjusted EBITDA guidance. And by affirming that and giving guidance for Q3, that implies that run rate that you referenced of about $60 million of adjusted EBITDA going into 2026. We also shared that we believe there's several points of additional operating leverage that we can realize specifically in R&D.

Now there will be some increased costs as well that we need to factor into 2026. But that run rate basis of around $60 million of adjusted EBITDA is probably a reasonable way to think about what 2026 might look like for Health Catalyst. Jason, what would you add?

Yes. And we'll continue to monitor, John. We're not in a spot where we're in position to guide to 2026 EBITDA at this point. But as Dan mentioned, that $15 million is our Q4 adjusted EBITDA run rate that we are anticipating. Then on your stock comp question. It is something that we are working on. We do expect stock-based compensation as a percentage of revenue to come down in 2026, where we'd expect it to be in the mid- to high-single digits next year.

And that's a structural change, John, that the compensation committee and the Board has approved that will enable that stock-based compensation to stay in the mid- to high-single digits in 2026 and beyond as well. .

[Operator Instructions] We will go next to Derek Gross with Piper Sandler.

I wanted to dig in on the net new platform clients guide. And apologies if this has already been asked, I've been jumping around on a few calls. But -- can you help us think about the contribution to that between some of your app layer client wins versus external client wins?

Yes, absolutely, Derek. I know that it's a busy day, not a problem at all. And that question hasn't been asked. So we have continued to see a similar pattern that we've commented on over the last few quarters that the majority -- the large majority, about 2/3 of the net new platform clients that have been added have come from our existing client base. That really speaks to the strength of our cross-sell motion and the efficiency of that cross-sell motion. That has continued through Q2 to be about 2/3 from existing clients, 1/3 net new clients within Health Catalyst portfolio.

We're also encouraged, as I mentioned, to see recent momentum even early in Q3 which is normally a quieter quarter from a bookings perspective. And that's different from what we experienced towards the tail end of Q2, whereas the big beautiful bill was being passed into law, and finalized, we saw some meaningful delays in the progression of those late-stage opportunities on the new client pipeline side. We've tried to account for that as we think of our new client goal, our net new client goal for 2025, even though we're pleased to be at 22 new clients year-to-date, we still felt it would be prudent to bring down that full year guide to 30 and also supported by a really robust pipeline, but acknowledging that we're still early in our ecosystems response to these Medicaid and research funding cuts.

And we wanted to account for that in our forecast and our guidance and view positive normalization as more upside to the forecast as opposed to being built into the forecast.

We'll go next to Daniel Grosslight with Citi.

Going back to John's question, it seems like some of the challenges you laid out are really not going to be resolved anytime soon. And we may even see an increase in uncertainty particularly in Medicaid which those cuts really don't come into effect until a couple of years or so. So as we look to growth in '26 and '27, I was hoping you could provide a little bit more detail on how we should think about your growth algorithm and really, I think previously, we've always spoken about kind of high-single-digit to low-double-digit growth. Does that mean that over the next couple of years, you're probably more likely to be kind of low-single digit, mid-single digit on top line growth?

Yes. Great questions, Daniel. I'll share a few thoughts, and then Jason, please feel free to share as well. So I think as you share these macro headwinds, we also would not be surprised that these are more multiyear headwinds. And that's something that we referred to in our prepared remarks that these Medicaid funding cuts are being absorbed now, they are larger than what we thought they would be a year ago or a quarter ago and they're taking effect a year sooner than some of the earlier drafts of the bill contemplated.

And so the whole ecosystem is still absorbing this. We're assuming that this will be a multiyear headwind as we think about growth rates and as you think about 2026, I think the building blocks that we've provided historically is a reasonable approach to kind of think about what 2026 might look like. So if you think about the new client building block, we've lowered the number of net new clients that we're targeting to achieve down to 30 and indicated that the amount of next year revenue per client may come in the lower end of that range. And so that may, when you do the math, contribute to, call it, 3 to 4 points of revenue growth from that new client building block.

From the existing client building block, we've revised down our dollar-based retention into the low 90s, so if you think about that as something like 93%, there would be a 7% gap to fill, which the new client building block helps to partially fill and then as we've discussed in prior years, there's always some in-year revenue growth that occurs, maybe a couple of points of revenue growth. So those are probably the 3 building blocks. But when you add those together, a scenario for 2026 where the overall revenue may be down 2 points or somewhere in that neighborhood is probably a directionally reasonable way to think about growth for 2026.

Now 2 other thoughts. Importantly, in mid-2026, 1 of the meaningful revenue headwinds and in our Technology segment, our platform migration headwind will go away as we complete -- as we largely complete the Ignite migration. And a part of our technology business that is slightly down based on that headwind will start to be a grower. We also shared in our prepared remarks that the other part of our technology business, the applications revenue has been growing really nicely. In the last 12 months ended June 30, that segment of our -- or that component of our solution grew over 20% year-over-year. And we believe that component could grow double digits for several years to come.

So we believe that will be a meaningful growth engine as part of the company moving forward in 2026 and beyond. Now the third part -- the third component of our solution is our services, and we shared in our prepared remarks that, that part of our business is slightly down. And that is the result of us proactively renegotiating and, in some cases, exiting some client relationships where we can improve profitability meaningfully. I would expect that, that's not only a 2025 impact, but also will impact 2026. So it's probably reasonable to think about the services component of our business being slightly down in 2026 as well. I think on the technology side, moving into -- in late 2026 and into 2027, we would expect there to be a reemergence of meaningful growth there, both that double-digit growth in the app segment as well as the removal of that headwind from a platform perspective, and that platform component then becomes a grower. Anything you'd add, Jason?

Think that Dan covered the top line very well. What I would mention is -- as we mentioned in the prepared remarks, we are laser-focused on making continued adjusted EBITDA progress and our recent restructuring efforts do set us up well for continued operating leverage as we look to 2026 and into the future. .

We'll move next to Sarah James with Cantor Fitzgerald.

This is Gaby on for Sarah. Could you just talk about if the expiration of enhanced premium subsidies on the marketplace revenue has come up in your conversations with the providers. Just when we think about what's looming for the providers, maybe that's more immediate than any Medicaid impact.

Yes. As if Medicaid and research funding cuts were not enough, that is another concern. Absolutely. And it depends on the economic model of our health systems, the degree to which that will impact them. But yes, that is a frequent topic of discussion just underscores the number of moving parts right now. And unfortunately, a number of those moving parts are moving in a negative direction. I think we are going to figure out as an ecosystem, how to absorb those things. and find a new normal and keep moving forward. And we're really grateful to help catalysts that, especially our applications level portfolio really helps CFOs, in particular, to ensure that on the revenue side, they're collecting all -- every penny that they should be collecting from a chargemaster management solution perspective with our Vitalware solutions and on the cost side, but they're managing their cost structure really, really effectively. And we help them to do that through power costing, power labor and other solutions as well.

So we're excited about what we can offer to help navigate these difficult times, but there's no question that these are challenging times for our end market.

[indiscernible] our final question to a follow-up to John Ransom with Raymond James.

Just kind of going back to the tone of the conversation, I mean, as we look at the timing of the cuts, you're probably going to get more direct to payment dollars next year than this year. The Medicaid stuff is 2028 yes, 2027, 2028. So I guess I'm just not understanding why these guys just wanted to pull panic mode. I understand that there were a lot of things on the menu, but then what we ended up with was pretty modest with most of the pain kind of pushed out to 2028 and beyond even happen. So have you -- Dan, you've be noticed a long time, have you say in your career, this sort of preemptive reaction versus what I think again, I mean, Medicaid spending is going to be up next year. Price increases are coming through. They're getting more out of their charge master. I just don't quite understand the disproportionate reaction, but I don't live in the world in not-for-profit. So -- maybe just kind of help us out a little bit?

Yes. They're great questions, John. And I would share in the world of not-for-profit, I've seen this cycle across the last nearly 15 years, probably 3 or 4 times. when there is a shock to the system, whether that was COVID, whether that was a 40-year high inflation, whether that was these meaningful cuts, there's conservatism built in, especially, I would say, in the not-for-profit space. So we have a large number of not-for-profit clients, many of our larger clients are not-for-profit clients where there's a conservatism and a risk aversion and a pulling back, delaying often of moving forward with projects that otherwise make a lot of sense. And I have absolutely seen that as I've been on the road and in discussions face-to-face with clients.

The Medicaid cuts and some of the other reimbursement cuts for many of the not-for-profit health system clients, the research funding cuts for academic medical center clients and many of those are hitting soon. I would also highlight that even a quarter ago, when we were all trying to estimate what was Congress going to do with regards to Medicaid cuts, the timing of the cuts, the size of the cuts, many estimates put the size of the cuts at about half of where they ended up, and many also estimated that the timing of implementation of the cuts would be a year or 2 later than where they are taking place.

And so it definitely got worse in terms of what was actually approved and signed into law, and there has been a really meaningful adjustment required. I think we spoke to 1 pattern that is encouraging, but we do not want to build right into our forecast, John, which is after the initial shock, we have seen some pipeline build and pipeline acceleration early in Q3 that's been encouraging to us. But we don't want to assume that, that's going to take place and that that's the new normal and all the adjustments have been made, we'd rather view that as more upside to our forecast and our model as opposed to base case.

So we're trying to give time and space for the whole ecosystem to kind of absorb these changes. and we're all going to learn a lot more over the next few months. But we felt it prudent. John, I'll give 1 example. A quarter ago, when I looked at our pipeline for net new client additions for Q2, I felt very good about our ability to get to that halfway mark or even beyond that halfway mark of the goal of 40 for the year, so that would imply around 20.

And then the late stages of the big beautiful bill negotiation came in a lot higher and sooner than many were expecting, and we saw meaningful delays in that pipeline. And that informs the way that we thought about the full year, not just for the new client side, but also for the existing client side, we don't want to be surprised in that way moving forward. So we have moved more to the upside case than in the base case and give ourselves time and space to keep learning more and understanding more what the impact will be of these funding cuts.

It appears that we have no further questions at this time. I will now turn the program back over to Dan Burton for any additional or closing remarks.

Thank you. We appreciate your time and your interest in Health Catalyst and we look forward to staying in touch in the future. Take care, everyone. .

Thank you. This does conclude today's Health Catalyst Second Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.