Q2 2025 Health Catalyst Inc Earnings Call
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Welcome to the health Catalyst, second quarter 2025 earnings conference call.
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I would now like to turn the call over to Jack Knight vice president of investor relations.
Good afternoon, and welcome to health Catalyst earnings conference call for the second quarter of 2025, which ended on June, 3025. My name is Jack Knight. I am the vice president of investor relations for health Catalyst. And with me on the call is Dan Burton. Our Chief Executive Officer, Jason Alger, our Chief Financial Officer and Dan Lear, our chief operating officer.
A complete disclosure of our results can be found in our press release issued today. As well as in our related Form 8K, furnished to the SEC, both of, which are available on the investor relations section of our website at IR health catalyst.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 macro 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 for deployment and development of our ignite data and analytics platform and our applications timing and status of ignite migrations acquisition and 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
To the risk factors in our form. 10K for the full year, 2024 filed with the SEC on February 26th 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 information or 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 growth margin the most directly comparable, gaap measure to adjusted technology growth 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 222025 revenue of $80.7 million and adjusted EBITDA of $9.3 million outperformed our guidance on each metric.
Additionally, we are encouraged with the results of our technology segment which recorded revenue of 52.9 million for the second quarter of 2025.
Representing 11% growth year-over-year.
while we remain confident in our long-term strategy and positioning
We are revising our full year 2025 Revenue, guidance to 310 million, to reflect performance. That has been meaningfully impacted by the recent 1 trillion dollar cut to Medicaid.
And additional billions in research funding cuts.
Importantly, even with this downward Revision in Revenue, we are maintaining our adjusted ibid. Do guidance of 41 million for 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 the pocket, the savings associated with their ignite, migration, which often represents a 20 plus percent savings relative to the cost of dots.
We believe that this increased frequency is directly tied to clients budget pressures resulting from Medicaid and research funding cuts.
we feel strong validation in our strategic decision to develop a disruptive Next Generation platform and ignite
Which is meaningfully better faster, more profitable and cheaper than Legacy Doss. As we continue to see our dose 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.
100 largest platform, client Relationships by technology revenue, from year ends 2024.
Of the 2 relations. We have not maintained 1 of these was related to a client bankruptcy event.
The second major factor in reducing the 2025 Revenue forecasts, 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 plant contract relationships. Particularly when our 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 companywide. Adjusted IBA 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 10 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 temps contractual components, as of June 30th.
While maintaining meaningful technology contracts in these client relationships.
Additionally. As part of our focus and client profitability, we've introduced tooling and the use of AI to more efficiently manage client, platform migrations, which is generally resulted in lower, Professional Services, non-recurring contracts, but higher client profitability,
The third contributor to the lowered 2025 Revenue, which represents approximately 1 point of 2025 Revenue growth.
To come from our care Vive business performance, primarily in the Life Sciences and 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 lowered 2025 Revenue which represents less than 1 point of Revenue. Growth is that our newest platform client editions have come with lower average booking sizes than what we experienced in q1?
And we believe this lower deal size May persist directly impacted by the Medicaid, and research funding cuts.
We expect our average booking size for net new platform clients in 2025 to be towards the lower end of the $300K to $700K range previously provided.
We experience 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, our technology Revenue with less than 20% Services Revenue,
With the July passage of the big beautiful bill.
Which includes 1 trillion dollars 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.
Updated m&a perspective, that we do not intend to pursue additional Acquisitions in the near.
To mid-term.
We are removing our previously shared 2028 Revenue Target of 500 million and our 2028 adjusted ebit 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. Ebit Target is more a function of our focus on delivering on near-term and mid-term profitability improvements for our shareholders.
Related to profitability Tailwind. 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 ebit that margins.
Our prioritize shareholder focus in the months and years ahead and help catalyst is meaningfully improved profitability.
We anticipate that delivering dramatically improved profitability in the form of growth in adjusted Evita and adjusted free cash flows enables us to deliver a return on the investment that our shareholders have made in health catalyst.
We believe we are well positioned to drive this improved profitability even with multi-year macroeconomic headwinds because of the strength of our portfolio of Technology Solutions, particularly our applications offerings which are enabled by a more flexible and modular ignite infrastructure.
3 years ago, when inflation spiked to a 40-year high. We primarily responded to that headwind by providing our cost reducing cost reducing temps 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 is as large as an existing client base.
By contrast, today, we are responding to the funding cut headwinds with a text first offering with applications that can offer tangible hard dollar, value and Roi.
To potentially help twice. The number of existing clients we can 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 Zone.
We are leading with our highest margin offering area. Our applications to help are more than 11,100 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 strengths 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 Eva margin of 30% during the 12 months. Ended June 30th 2025.
Our strategic acquisition activity over the past several years has primarily focused on acquiring industry-leading applications.
Enabling us to assemble the strongest portfolio of applications that we have ever offered to our clients.
We Believe revenue from applications has the potential to grow at a double-digit pace in the years to come.
And adjusted ebit, that margin expansion.
We also believe we have our greatest competitive differentiation in our application solutions, where we primarily compete against smaller point solution companies with few existing client relationships, subscale data aggregation capabilities, and who often are not yet generating profits.
We believe our ability to leverage more than 1100 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 provide us, meaningful, long-term differentiation, and competitive modes, 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 gross margin perspective, by our Proactive or structuring. And in some cases exiting of services contracts like our previously announced decision to exit the ambulatory operations, 10s pilot contracts, which occurred as of June 30th.
We expect this will contribute to improving Services, gross margins in late 2025 and into 2026, but we'll also result in our services segment being slightly down from a revenue perspective in 2025 and likely in 2026 as well.
As part of our primary focus on driving improved profitability and operating efficiency.
We have implemented a restructuring effort that streamlines the organization to better align with our current stage and priorities.
This restructuring was announced to team members earlier today and is anticipated to be largely complete by next Monday, August 11th.
These actions include meaningful non- headcount cost reductions and will also impact approximately 9% of our total Workforce.
We anticipate this restructuring plan and our previously described updates to client contracts will improve profitability by over 40 million dollars on an annualized basis.
Which we expect to rightsize our cost structure across our business and be accretive to gross margins adjusted, IA, 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 Eid, dog. Guidance of 41 million, even with the meaningfully lower total revenue guide,
We are also providing Q3 adjusted evaa guidance of approximately 10.5 million representing 44% growth in adjusted. Eva year-over-year.
In full year, guidance implies a Q4 adjusted Eva of approximately 15 million.
Which on an annualized basis, places the company at a run rate of approximately 60 million of adjusted Eva going into 2026.
This also showcases our rapidly expanding adjusted ibida margins.
Which with our Q3 and for your Revenue. Guidance also implies adjusted. Eva do margins approaching approximately 20% in Q4 of 2025.
Well, ahead of our original 28 2028 Target of 20%, adjusted e without margins for the company.
We now believe we can expand adjusted. Eva 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 Ava, 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 manager team with support from our board have announced changes.
To our stock-based compensation practices, which we expect will enable the company 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 of accountability and servant leadership.
This represents an approximate 80% reduction, in my total compensation for 2026 and is similar to my request and the board's support in July 2022. For me to work for zero base, salary, zero bonus, and zero, Equity compensation from July, 1st 2022, through December 31st, 2023.
It is also important to note that I can continue to be 1 of help catalyst's largest and longest standing shareholders.
But 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 with laser focus on meaningfully improved profitability as we recognize the the fundamental shareholder value creation that this profitability expansion represents.
We believe this dramatic growth in the company's adjusted Evita and adjusted free cash flow.
Will create fundamental shareholder value. And as such, we expect that as this profitability Improvement occurs, there will be a corresponding growth in the company's market value.
We believe there is a current disconnect between the company's intrinsic value and the company's public market value.
And we anticipate this disconnect will dissipate with continued demonstrated profitability Improvement.
The board also takes seriously, its fiduciary duty to maximize shareholder value and is committed to using all available tools to drive long-term shareholder value 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 with. We born at night, migration update.
Thank you Dan. We continue to make steady progress on our ignite, migration efforts and remain on track with our previously, shared timelines. As a reminder ignite carries a more modular and cost-efficient structure typically more than 20% lower cost than Doss.
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 discipline Capital, allocation
We remain committed to realizing a strong return on recent acquisitions 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 help Catalyst analytics Summit or has in Salt Lake City.
The event will be more deeply focused on strengthening our existing client relationships and we'll 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 longtime CFO of bosera communications.
Both our Communications was a publicly traded Healthcare technology company that provided digital communication and workflow technology for hospitals prior to its acquisition by Stryker. In early 2022 for approximately 3 billion dollars.
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 affected, June 30th 2026
By then I will have been 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 Health Care 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 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,
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 growth margin was 50%. Representing a decrease of approximately 30 basis points year-over-year and up approximately 30 basis points compared to q1 2025.
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 1-time, project-based Revenue, that was recognized in Q2.
In Q2 20225 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 20224.
Adjusted. Eva death for Q2 2025 was 9.3 million exceeding. Our Q2 guidance of approximately 8 million and representing the highest adjusted ibida 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, ex 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 ibida of approximately 10.5 million. And for the full year. 2025 we expect total revenue of a of approximately 310 million and we continue to expect adjusted evida 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 segments 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 and some Services contracts, including the decision to exit pilot ambulatory, operations, temps contracts, which ended on June 30th 2025. We experienced, 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 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 Eva guidance, despite this reduction in Revenue.
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 Parts, 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 growth 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 to 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 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
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, 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.
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Thank you. Once again, ladies and gentlemen. That was star 1 for any questions.
Our first question comes from is Elizabeth Anderson with evercore isi.
Uh, thanks for the question. This is Johanna for Elizabeth
Uh on your life science business, can you give us a bit more color, how that business is doing and what level of investment? Do you think you need um, for that business to grow? Thank you.
Absolutely. Thank you Joanna. Um, as we mentioned in our prepared remarks, uh, we have seen some delays in a few late stage opportunities related to your care 5, 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. Uh, we, we are hopeful that those delays might subside as Life Sciences, clients, uh, 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, uh, that revenue from our forecasts and would view, you know, the closing of those opportunities as more upside relative to our forecast.
Thank you.
You're welcome. Next to John Ransom with Raymond James.
Hi. Um, can you hear me?
Yes, we can.
Great. Um, so 2 questions for me, first of all, um,
Yeah, you look at the public hospital equities, and they kind of rallied after the bill was done.
So, what you're describing in the in 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.
And the back end. And then the second question, is a number's question. If we kind of look at your forecast for 4 q.
And take the jumping off point.
What does that imply for 2026 Eva?
Kind of both.
Totally, but, uh, and then they even, uh, excess.com. Thank you.
Yeah, thank you for those 2 questions, John. I'll share a few thoughts in the Json. Please feel free to share any additional thoughts as well on your first question. Uh, John I think uh, it's an insightful question and 1 of the things that we would share is we have a large number of uh of clients that are in the not-for-profit space. We also have 4 profit clients and some that are publicly traded but we would skew much more towards uh the not-for-profit space uh as well as having a, a larger representation in the academic Medical Center space. As I have been out visiting uh face to face with C Suite Executives across. Uh, many of our largest clients. There isn't 1 of these C Suite, Executives, that isn't reeling. And, and looking for a way to plan for a new normal, uh, as Medicaid is, such a large source of funding for most, not for-profit Health Systems and differently. Uh, but but of a similar effect, our academic Medical Center clients
We 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, as well as how they will play through the P&L and the balance sheet of our clients. 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, as the big beautiful bill was being, uh, signed into law. Uh, and and we experience 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. Uh, it, uh, it is a huge, um, 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, uh, to adjust to that new normal. Uh, but we, we are hopeful that that adjustment will occur. We would just move more to, to upside to our forecasts 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 EBA, as we shared, we're grateful to be in a position, because of a few positive tailwinds, to reaffirm our 2025 EVA guidance or adjusted EBIT guidance.
And by affirming that and giving uh, guidance for Q3 that implies that run rate that you referenced of about 60 million of adjusted IBA going into 2026. We also shared that we believe there's several points of additional operating leverage uh, that we can realize specifically in R&D. Now there will be some increased costs as well. Uh, that will need to factor into 2026 but that run rate basis of around 60 million of adjusted. Eva is probably a reasonable way to think about uh what 2026 might look like for health Catalyst. Jason what would you add?
yeah, and we'll, we'll continue to monitor John, we're not, we're not in a spot where
we're in position to guide to 2026 Eva at this point. But as Dan mentioned, that, 15 million is our Q4 adjusted to the ibida Run rate that we are 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 have approved, which will enable that stock-based compensation to stay in the mid to high single digits in 2026 and beyond as well.
Once again, if you have a question, please press star 1 on your telephone keypad, we will go next to Derek Gross, with Piper Sandler.
Hi guys. Uh, thanks for the question. Um, wanted to dig in on the net. New platform clients guide and apologies. If this has already been asked as in uh, jumping around on a few calls, but um, can you help us think about the contribution to that between um some of your app layer client wins versus external client wins. Thank you.
We have continued to see uh, 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, uh, 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 crosso motion that has continued through Q2, uh, to be about 2/3 from existing clients 1/3, uh, net new clients uh, 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, uh, that's, that's different from what we experience towards the tail end of Q2, whereas the big beautiful bill was being, uh, passed into law, uh, and finalized, we saw some meaningful delays, uh, in, uh, the progression of those of those late stage opportunities on the new client pipeline side. We've tried to account for that, as we think of of our new client goal, our net new client goal for for 2025, even though we're we're pleased to be at 22 new clients a year to date. Uh, we still felt it would be prudent to bring down that full year guide to 30, uh, and and, and also supported by a really robust pipeline. Uh, 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, uh, in our forecast and, and our guidance and view, you know, positive um, normalization as more upside to the forecast as opposed to being built into the forecast.
Um great. Thank you so much.
Thanks Derek.
We'll go next to Daniel, gross light with City.
Hi. Thanks for taking the question. You know, going back to John's question is, you seems like some of the challenges you laid out. Um, are are really not going to be resolved anytime soon. And, and we may even see an increase in uncertainty particularly particularly in Medicaid which, you know, those cuts really don't come into effect until a couple 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, you know, 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, you're probably more likely to be kind of low single digit mid single digit on, uh, Topline growth. Thank you.
Yeah, great questions. Daniel. I'll share a few thoughts and then Jason, please feel free to share as well. So uh I I think uh as you uh shared these these macro headwinds, we also would not be surprised if these are more multi-year headwinds. And that's something that we refer to in our prepared remarks uh that that these Medicaid, uh, funding cuts are being absorbed now. Uh, 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, of the bill contemplated. And so, the whole ecosystem is still absorbing this. We're assuming that this will be a multi-year headwind, as we think about growth rates, uh, and 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,
Uh, that were targeting uh to to achieve down to 30 and indicated that the the the amount of next year Revenue per client may come in the lower end of of that range. And so that may when you do the math uh contribute to you know, call it 3 3 to 4 Points uh 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.
Uh, 2, other thoughts importantly, in mid 2026, um, 1 of the meaningful Revenue headwinds in our technology segment. Our, 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, we'll start to be a grower. Uh, we also shared in our prepared remarks that the other part of our technology business, the applications Revenue, uh, has been growing really nicely. And in the last 12 months ended June 30th that segment of our or that, uh, 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, uh, engine, uh, as part of the company moving forward in 2026 and Beyond. Now, the third part, the third component of our Solutions is our services and we share
In our prepared remarks, 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 meaningfully improve profitability. I would expect that this is 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 20 in late 2026, and into 2027, we would expect there to be a re-emergence of meaningful growth there. Both uh, that double digit growth in the app segment, as well as the removal of that headwind. Uh, from a platform perspective and and that platform component, then becomes a grower
Anything you'd add, Jason? I think Dan covered the top line very well. What I would mention is...
As we mentioned on the prepared remarks, we are laser focused on making continued adjusted, evida progress.
And our recent restructuring efforts do set us up well for continued operating leverage as we look to 2026 and, and into the future.
We'll move next to.
Hi everyone. This is Gabby 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. Um, with the providers just when we think about what's looming for the providers, maybe that's more immediate than any Medicaid impacts.
Yes.
As if, as if Medicaid and research funding Cuts were not enough. That is another concern. Absolutely. And it depends on, on the, um, economic model of, of our health systems, the degree to, which that will impact them. But yes, that is a frequent. Um, topic of discussion. Uh, 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, uh, and find a new normal and keep moving forward. And we're really grateful that Health Catalyst 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. Uh, 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.
Will return as our final question. Is to a follow-up to John Ransom with Raymond James.
Hey there. Um just kind of going back to the tone of the conversation.
I mean, as we look at the
Timing of the cuts.
You know, you're probably going to get more direct to payment.
Uh, dollars next year than this year. You know, the Medicaid stuff is 2028.
Yeah, 2027, 2028. So, I guess I'm just not.
understanding why these guys just went into full 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 and that even happened. So have you ever Dan? You've been doing this a long time? Have you seen in your career?
This sort of, preemptive reaction.
Coming through, they're getting more out of their chargemaster. I just don't quite understand the disproportionate reaction, but I don't live in the world and not-for-profit. So maybe just kind of help with that a little bit.
Yeah, they're great questions John and I would share in the world of not for profit. Um, I I've seen this cycle across the last nearly 15 years, probably 3 or 4 times when there is a, when there is a, a shock to the system, uh, whether that was coid, whether that was, uh, a 40 year high inflation, whether that was, uh, these meaningful cuts. Um, there's a conservatism, uh, built in especially I would say in the not for-profit space, and we have a large number of not for-profit clients. Many of our larger clients are not for-profit clients, where there's, there's a conservatism and a risk, aversion and a pulling back, uh, delaying often of of moving forward with projects that otherwise make a lot of sense. Uh, and I have absolutely seen that as I've been on the road and in discussions face to face with, with clients, the Medicaid cuts. Um, and and some of the other, uh, reimbursement cuts for many of are not for profit Health System clients
The research funding cuts for academic Medical Center, clients. And many of those are hitting uh soon I would also highlight that, you know, even a quarter ago. Um when we were all trying to estimate, what was Congress going to do with regards to Medicaid Cuts? Uh, the timing of the cuts, the size of the cuts, many estimates put, the the size of the cuts at about half of where they ended up and many also estimated that the, the timing of implementation of the cuts would be a year or 2 later than where, uh, they are taking place. And so, uh, it definitely got worse in terms of what was actually, uh, approved and signed in into law. And there has been a really meaningful adjustment required. Um, I think
We we spoke to 1 pattern that that is encouraging, but we do not want to build right into our forecast. John, which is, you know, after the initial shock, we have seen uh, some pipeline build and pipeline acceleration, uh, early in Q3 that's been encouraging to us, we don't want to assume that that's going to take place. Uh, and that that's the new normal and all the adjustments have been made. We'd rather view that as more upside to, to our forecasts and our model as opposed to base case. So we're we're trying to give time and space for the whole ecosystem to kind of absorb uh, these changes. And we're all going to learn a lot more, uh, over the next few months, but we felt it prudent. You know, John.
I'll give one example from a quarter ago. When I looked at our pipeline for new 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 it around 20.
And then, uh, the the, the, uh, late stages of the big, beautiful build negotiation came in a lot higher and sooner than many were were, uh, were expecting and we saw meaningful delays, uh, in that Pipeline and, uh, and that informed, the way that we thought about uh the full year, not just for the new client side but 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 in the base case and
Give ourselves time and space to keep learning more and understanding more about what the impact will be of these funding cuts.
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.