HCAT - NASDAQ

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 lowered 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 this 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 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 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 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 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 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 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 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 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?

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 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.