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…

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…

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 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 of adjusted total operating expenses were 38% of revenue which compares favorably to 40% in Q2 2024. Adjusted EBITDA for Q2 2025…

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 Carevive 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 stock comp?

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 these 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…

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 shared 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…

I 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 charge master 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. 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 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…

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.