Health Catalyst, Inc. Q1 FY2025 earnings call

• The company is pleased with the first quarter 2025 financial results, with total revenue of $79.4 million and adjusted EBITDA of $6.3 million, both above recent guidance. - Tech segment had revenue of $51.5 million in Q1 2025, up 10% year-over-year. 10 net new platform clients were added in Q1, with about two-thirds from existing app clients. The average total ARR and non-recurring revenue per net new platform client was around the midpoint of $300,000 to $700,000. - Ignite platform is a strategic shift, more flexible, lower-priced, with shorter sales cycles. Ignite has about 70% gross margins vs. 60% for DOS. Net new Ignite platform client adds have a more profitable 80-20 revenue mix. - Dan LeSueur provided an Ignite migration update, expecting to complete the majority of large client migrations by the end of 2025 and most by mid-2026. - Highlighted new client wins like Midwest Health Information Exchange client, Canopy Cancer Collective, and a large patient engagement opportunity. Also mentioned integration progress of recent acquisitions and expansion of India-based R&D footprint.

In the first quarter of 2025, total revenue was $79.4 million. Technology revenue was $51.5 million, representing a 10% year-over-year increase, which is about 64.86% of the total revenue. Professional Services revenue was $27.9 million, an increase of 1% year-over-year, accounting for approximately 35.14% of total revenue. The adjusted Technology gross margin in Q1 2025 was 67%, and the adjusted Professional Services gross margin was 16%.

• For Q2 2025, expect total revenue of approximately $80.5 million and adjusted EBITDA of approximately $8 million. - For full year 2025, expect total revenue of approximately $335 million, Tech revenue of approximately $220 million, and adjusted EBITDA of approximately $41 million. - Q2 Technology revenue is expected to be up sequentially and over 10% year-over-year. Professional Services revenue in Q2 is slightly down sequentially and year-over-year due to implementation delays. - Adjusted Technology gross margin is expected to be roughly flat to slightly down quarter-over-quarter. Adjusted Professional Services gross margin in Q2 is expected to be approximately flat to slightly down. - Anticipate adjusted Technology gross margin in the second half of 2025 to be higher than the first half. Adjusted Professional Services gross margin for 2025 is expected to be in the high teens. Operating expenses as a percentage of revenue to decline in 2025, and stock-based compensation as a percentage of revenue to reduce.

• Macro-economic challenges including impact of inflation, tariffs, and interest rate environment. - Potential changes to government funding and payment programs that could negatively impact clients' business. - Uncertainties in bookings, pipeline conversion rates, timing and status of Ignite migrations. - Uncertainties in acquisition integration.

Q: Anne Samuel asked about the decision-making process under the modular strategy and cadence of adding new customers.

A: Dan Burton said there are differences due to modularity and lower price point of Ignite. Lower price point means fewer approval levels, shorter sales cycles. Jason Alger added about early traction with Ignite Spark. Dan Burton also mentioned streamlined decision-making process due to lower price point.

Q: Jared Haase asked about the higher weighting of tech vs. services in Ignite clients.

A: Dan Burton said at lower price point, focused on specific use cases with tangible ROI, technology more covers space needed for measurable improvement, AI expands footprint, contributing to 80-20 Tech mix which is favorable.

Q: Jessica Tassan asked about how KPIs are accounted, including average ARR, implementation timeline, and upfront acquisition contribution.

A: Dan Burton explained that the $300,000 to $700,000 average is for net new platform clients, existing client migration can be a headwind to dollar-based retention. Implementation timeline for existing app layer clients and new clients is similar, a few months. Jason Alger said there was a slight upfront acquisition contribution in 1Q, which was a slight EBITDA headwind but expected to turn into a tailwind in 2025.

Q: Elizabeth Anderson asked about Tech margins and timing of uplift.

A: Dan Burton said they expect to start seeing uplift in the second half of the year, with about two-thirds of migration completed by the end of 2025 and mostly completed by mid-2026.

Q: Richard Close asked about net new platform clients and Tech margins timing.

A: Dan Burton said existing Health Information Exchange client implementations have delays due to increased scope, but new client pipeline is robust with confidence in hitting 40 net new platform clients. Tech margins expected to start lifting in the second half of the year.

Q: Daniel Grosslight asked about Professional Services revenue cadence.

A: Dan Burton said late-stage opportunities delayed due to funding uncertainty, increased scoping in Health Information Exchange client implementations, and Q1 bookings translating to revenue in the second half contribute to revenue ramp in the back half of 2025.

Q: Jenny Shen asked about price increases.

A: Dan Burton said typical technology annual increase in contracts is mid-single-digits, clients have accepted and been supportive.

Q: Scott Schoenhaus asked about upfront acquisition traction and EBITDA profitability.

A: Dan Burton said they feel good about upfront acquisition progress, with some revenue ramping in the second half, and upfront was a slight EBITDA headwind in Q1 but expected to turn into a tailwind in the second half.

Q: Stan Berenshteyn asked about Ignite replatforming headwinds and win rates.

A: Dan Burton said headwinds will be greater in 2025 vs. 2026, and there's a 2x to 3x conversion rate advantage when cross-selling to existing clients vs. new clients with Ignite.

Q: Jeff Garro asked about Spark product and Microsoft Azure marketplace opportunity.

A: Dan Burton said Spark is a purpose-built solution for mid-market, enabling entry into new market, and there's a go-to-market expansion with Microsoft including being on Azure marketplace and joint activity.

Q: Sarah James asked about Ignite client response and revenue retention.

A: Dan Burton said most clients find Ignite resonant, but there are some clients pocketing savings, and the 103% dollar-based retention target factors in these dynamics, with some headwind factored in.