Welcome to the Health Catalyst Third Quarter 2024 Earnings Conference Call. All participants are now in listen-only mode, and we will open the floor for questions after the presentation. I would 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 third quarter of 2024, which ended on September 30th, 2024. 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 the remainder of 2024 and full year 2025. Our ability to attract new clients and retain and expand our relationships with existing clients, trends, strategies, the impact of the macroeconomic challenges, including the impact of inflation, and the interest rate environment, the tight labor market, bookings, our pipeline conversion rates, the demand for deployment and development of our data and analytics platform, M&A activity and the general anticipated performance of our business. These forward-looking statements are based on management's current views and expectations as of today and should not be relied on 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-Q for the second quarter 2024 filed with the SEC on August 8th, 2024, and our Form 10-Q for the third quarter of 2024 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 and has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. A reconciliation of non-GAAP financial measures for the third quarters of 2024 and 2023 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, or net cash from operating activities, the most directly comparable GAAP measure to adjusted free cash flow discussed today, and have therefore not provided 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 pleased to share our third quarter 2024 financial performance and other recent highlights. I will begin today's call with summary commentary on our third quarter 2024 results and outlook. We are encouraged by our third quarter 2024 financial results including total revenue of $76.4 million and adjusted EBITDA of $7.3 million, both of which exceeded the midpoint of our previous guidance. Additionally, we are updating our expectations for both revenue and adjusted EBITDA for 2024. On revenue, we now anticipate 2024 revenue will be between $305 million and $311 million. On 2024 adjusted EBITDA, we are raising our expectations to between $25 million and $27 million. Likewise, we are pleased with our bookings performance through Q3, 2024, and we are reiterating our full-year 2024 bookings expectations, inclusive of net new platform subscription client additions and dollar-based retention rate. We will discuss in greater detail shortly. Now, let me highlight some additional items from the quarter. You will recall from our previous earnings calls that we measure our company's performance in the three strategic objective categories of improvement, growth, and scale. And we'll discuss our quarterly results with you in each of these categories. The first category, improvement, is focused on evaluating our ability to enable our clients to realize massive, measurable improvements while also maintaining industry-leading client and team member engagement. Let me begin by sharing an example of a client improvement from a recently published case study. Archiving unique and complex data is challenging for health systems. As data resides in multiple disparate systems and includes both structured and unstructured data. Traditional health care data archiving methods can be costly and inefficient, which hinders data sorting and utilization efforts. Guy's and St. Thomas' NHS Foundation Trust recognized the need for a scalable and sustainable approach to archiving and accessing clinical data. The organization was committed to maintaining access and utilization of historical data dating back as far as 30 years, but it lacked scalable and sustainable approaches to archiving and quickly accessing clinical data from decommissioned legacy systems. Several legacy systems were built on aging technology, which increases the risk of data breaches and system failures. As a result, Guy's and St. Thomas' initially attempted to build an in-house solution, but increasing costs and complications slowed development time, and the organization needed to find a better solution quickly to preserve historical data. To combat this issue, Guy's and St. Thomas' partnered with Health Catalyst to ingest data from 60 source systems into the Health Catalyst data platform to streamline its data archiving processes. The Health Catalyst data platform offers many advantages compared to cold storage as our platform provides a secure, modern, and reliable system, ensuring that teams across the organization continue to access the data. Together with Guy's and St. Thomas', we built analytics applications to visualize data and provide comprehensive reporting to help drive actionable improvement. By leveraging Health Catalyst data platform, the organization created a robust, scalable, and cost-effective long-term solution that helps Guy's and St. Thomas' improve patient outcomes and realize operational efficiency, resulting in over $8.5 million in cost savings. Following these positive results, the organization plans to build additional analytics and aggregate data from 70 more source systems into the data platform. Also in the improvement category, we have been fortunate to receive additional external recognition. First, we are excited to be named one of the Best Workplaces in Healthcare by Fortune for the second year in a row, as a Top Workplace in Utah by the Salt Lake Tribune for the 11th year in a row, and as one of America's Greatest Workplaces for People with Disabilities by Newsweek. We were also honored as part of the Utah 100 by Mountain West Capital for the 10th time, a list that includes the fastest-growing companies in Utah. Lastly, we are excited to share that Jessica Curran, our Vice President of Data Science and Analytics, was recently named a finalist for the Women Tech Awards by the Women Tech Council, recognizing the exceptional work Jessica does as the product owner for Health Catalyst's Healthcare.AI, a suite of AI products and expert services that help hospitals and health systems dramatically expand the use of AI to improve healthcare decision-making. Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. Consistent with what we have shared over the last few quarters, we are encouraged to see health system operating margins steadily improving and stabilizing. This improving end market contributes to our robust pipeline and our continued confidence in our expectation that our top-line growth will accelerate back to double digits in 2025. As such, we are reiterating our full-year 2024 bookings expectations inclusive of net new platform subscription additions in the low 20s and our dollar-based retention rate between 100% and 106%. We are excited that low 20s net new platform subscription additions would represent the best year in Health Catalyst's history for this metric, underscoring the significant client demand we continue to see for our solutions. Related to our full-year 2024 bookings expectations, let me first share a reminder that similar to prior years, Q4 is anticipated to be an important bookings quarter. For new clients, we continue to anticipate the average ARR plus non-recurring revenue for 2024 net new platform subscription clients will be between $400,000 and $1 million. As it relates to our 2024 dollar-based net retention, we are reiterating our expectations shared on our Q2 call of 100% to 106%. Q4 bookings will have a significant impact on where we end up on our new client performance and dollar-based net retention for 2024. As a reminder, dollar-based net retention excludes items such as non-recurring professional services revenue as well as expansions within our non-platform application only client base. We anticipate these two categories of existing client expansion which fall outside of the current definition of dollar-based retention will be meaningful drivers of revenue growth, and we expect they will also contribute to our adjusted EBITDA growth in 2025 due to their higher margin profile than expansions. Given that these important growth categories fall outside of our current definition of dollar-based retention and our desire to provide shareholders with meaningful insight into our growth drivers, we are continuing to consider whether it would be helpful to update the growth metrics we have historically shared. We anticipate we will be in a position to share this potential update in early 2025. Given the importance of our next-generation Ignite platform and enabling our growth and product strategy, and consistent with last quarter's earnings call, our Chief Operating Officer, Dan LeSueur, has joined this earnings call. We expect that he will join future earnings calls to provide status updates and help answer Ignite-related questions. With that, let me turn some time over to Dan LeSueur.

Thank you, Dan. We continue to see strong demand among existing clients to migrate to Ignite and steady progress with implementing migrations that are underway. We are generally on schedule relative to forecasted timelines for migrations. We have a dedicated team that is assisting with these migrations, and we anticipate we will continue to migrate our existing DOS clients to Ignite over the next couple of years. We also continue to welcome new clients directly onto the Ignite platform. Given the advantages of the Ignite platform related to elastic compute and modularity, we're pleased to offer a flexible menu of options for clients to benefit from these improved efficiencies. These options include expanding their relationship and spend by purchasing additional applications and features, immediate savings while maintaining the same functionality through a price reduction as part of the migration, or maintaining existing spend and realizing improvements in operations and functionality from the enhanced capabilities of Ignite. Over the course of the next few years, we anticipate our clients will continue to follow along the spectrum of these three options. Importantly, during this migration, we will continue to be proactive in cross-selling and upselling additional applications to drive expansion within our existing client base, while also ensuring that we provide compelling value to our clients. With that update, let me turn it back to Dan Burton.

Thank you for that update, Dan. Next, I want to highlight a meaningful expansion with a long-standing client, Wisconsin Statewide Health Information Network or WISHIN, an independent not-for-profit organization dedicated to bringing the benefits of widespread secure, interoperable health information technology to patients and caregivers throughout Wisconsin, has expanded its partnership with Health Catalyst. This multi-year expansion includes migration of technology and services to Ninja Universe, Health Catalyst Ignite interoperability platform. Ninja Universe is an end-to-end cloud-native platform with applications purpose-built for health information exchanges like WISHIN. We are excited and grateful for the opportunity to expand our partnership and look forward to continuing to help support WISHIN in our shared commitment to improve the health of individuals and communities in Wisconsin. Additionally, I'm excited to announce a meaningful new client partnership with CyncHealth. CyncHealth also recently selected Health Catalyst Ninja Universe solution, our Ignite interoperability platform. By leveraging Ninja Universe, we are excited to help CyncHealth achieve its mission to bring trust and value to health information technology by creating solutions for moving health data forward. Additionally, we are pleased to announce that we recently signed a new Ignite partnership with Ortho Nebraska to provide them with a robust data and analytics infrastructure to support their strategic initiatives. We continue to anticipate a return to double-digit revenue growth and approximately 50% growth in adjusted EBITDA in 2025 compared to 2024, consistent with our prior commentary and even after raising our 2024 adjusted EBITDA guidance. As always, execution against our Q4 bookings target is an important contributor to achieving our 2025 growth expectations. I would also like to share a few comments related to our acquisition strategy. Consistent with what we have shared in the past, we are excited to announce we have signed a definitive agreement to acquire Intraprise Health. Intraprise is a tech-enabled cybersecurity provider, offering an end-to-end cybersecurity risk management platform and services to protect its clients from cyberattacks and manage follow-on liability in the event of an incident. Cybersecurity is a critically important area for our clients, and Intraprise is ranked number one in Class' recent rankings in this category. We look forward to welcoming Intraprise to Health Catalyst and are excited about how this combination will help drive growth and help us continue to address the areas that are most important to our clients, including a robust security infrastructure as part of our Ignite solution. The purchase price is $43 million and will be a combination of cash and equity. We anticipate this acquisition will close by the end of the year, and it will be immaterial to our financial statements in the near-term. Over the last several years, we've made a number of strategic acquisitions. We have developed an integration playbook that allows us to efficiently and effectively integrate a new asset into the broader Health Catalyst solution ecosystem so that we can drive maximum value for our clients and create maximum value for our shareholders. That integration playbook includes cross-training sales teams, quickly identifying areas of redundancy, and driving towards an optimal cost structure. Further, we have continued to maintain a pipeline of acquisition opportunities that enable us to act as a consolidation platform and support our clients and their improvement goals. We anticipate we will continue to be a consolidator, which will help us deepen our relationships with clients through our cross-selling efforts, where as a reminder, we are more than twice as effective in selling to clients when we have an existing relationship compared to a new prospect that doesn't have a relationship with Health Catalyst. We've heard consistent feedback from our clients that they will continue to focus on consolidating their vendor relationships, and we believe our acquisition strategy positions Health Catalyst well to be one of these long-term strategic partners. Before turning the time over to Jason, I also want to share that we are honored to announce that Dr. Jill Hoggard Green will be joining the Health Catalyst Board of Directors effective December 1st, 2024. Jill is the former Chief Executive Officer of the Queens Health System and has been an extraordinary leader throughout her career. A registered nurse whose career includes work with oncology, bone marrow transplant units, and hospice programs at leading hospitals, ambulatory, and home health services in Utah, Oregon, and North Carolina, Jill has dedicated her life to improving patient care. We are excited for Jill to join our Board of Directors and anticipate her contributions will be significant and impactful over the months and years to come. With that, let me turn the call over to Jason. Jason?

Thank you, Dan. Before diving into our quarterly financial results, I want to echo what Dan shared and say that I am pleased with our third quarter performance. Before jumping into our objective category of scale, I would be remiss if I didn't highlight Dan Burton's continued commitment to serve the leadership. Dan was recently awarded both a Decade of Impact Award by the Women Tech Council and as a Healthcare Hero by Utah Business Magazine. We feel fortunate to have Dan leading our company, and it's a great pleasure to work alongside such a tremendous leader. I will now comment on our strategic objective category of scale. For the third quarter of 2024, we generated $76.4 million in total revenue. This represents an outperformance to the midpoint of our guidance, and it represents an increase of 3% year-over-year. Technology revenue for the third quarter of 2024 was $48.11 million, representing 6% growth year-over-year. Professional services revenue for Q3, 2024 was $27.7 million, roughly flat year-over-year. For the third quarter of 2024, total adjusted gross margin was 48%, representing an increase of approximately 70 basis points year-over-year. In the Technology segment, our Q3, 2024 adjusted technology gross margin was 65%, and a decrease of approximately 330 basis points relative to the same period last year and roughly in line with previously shared expectations. This year-over-year performance was mainly impacted by upfront costs associated with the deployment of Ninja Universe, Ignite's interoperability platform without associated revenue, which generally ramps six months or more after contract signing, as well as temporary headwinds due to the ongoing migration efforts from DOS to Health Catalyst Ignite. In the Professional Services segment, our Q3 2024 adjusted Professional Services gross margin was 17%, representing an increase of approximately 550 basis points year-over-year and a decrease of roughly 330 basis points relative to the second quarter of 2024. This quarterly performance was primarily driven by a combination of ongoing service costs prior to recognition of revenue on project-based arrangements and slightly more tense resourcing in ambulatory operations. In Q3, 2024, adjusted total operating expenses were $29 million. As a percentage of revenue, adjusted total operating expenses were 38% and which compares favorably to 44% in Q3, 2023 and highlights our continued focus on driving additional operating leverage and cost discipline. Adjusted EBITDA in Q3, 2024 was $7.3 million, exceeding the midpoint of our guidance and representing an increase of $5.3 million relative to the same period last year. This Q3, 2024 adjusted EBITDA result was mainly driven by the quarterly revenue outperformance mentioned previously, along with the timing of some non-headcount expenses that we anticipate will be pushed out to the fourth quarter. Our adjusted net income per share in Q3, 2024 was $0.07. The weighted average number of shares used in calculating adjusted basic net income per share in Q3 was 60.4 million shares. Turning to the balance sheet, we are pleased with the strength of our financial position, which provides us with meaningful financial and strategic flexibility. We ended Q3, 2024 with $387.2 million of cash, cash equivalents, and short-term investments compared to $308.3 million as of Q2, 2024. In terms of liabilities, as of the end of Q3, 2024, the face value of our outstanding convertible notes is a principal amount of $230 million due in April 2025 and the face value of our initial term loan is $125 million. As it relates to our financial guidance, for the fourth quarter of 2024, we expect total revenue between $78 million and $84 million, and adjusted EBITDA between $6.8 million and $8.8 million. And for the full year 2024, we expect total revenue between $305 million and $311 million and adjusted EBITDA between $25 million and $27 million, which represents an increase of $1 million to the bottom and top ends of the range. Now, let me provide a few additional details related to our Q4, 2024 guidance. We continue to anticipate that our year-over-year total revenue growth will be higher in the second half of 2024 compared to the first half of 2024. With that said, we have seen a few dynamics that are impacting our second half and Q4 revenue growth, which helped inform our wider-than-typical revenue range for Q4. First, as we mentioned on our prior earnings call, we signed more contracts in the first half of 2024 related to international and health information exchange clients. These contracts generally take longer to ramp into revenue than traditional Ignite contracts. These extended timelines can have an impact on our quarterly revenue expectations as the revenue recognition for some of these contracts could be delayed into early 2025. Next, we've also seen a few projects that would result in one-time revenue recognition be pushed into early 2025. Where we initially forecasted that these would be finalized in 2024, which would have allowed us to recognize the revenue in 2024. Lastly, as we have mentioned previously, throughout 2024, we have proactively shifted our focus towards the higher-margin solutions in our pipeline, and we are pleased that this mix has contributed to our adjusted EBITDA progress, which is ahead of our initial guidance. This shift in our focus has also resulted in lower TEMS bookings than we had initially forecasted. While we are very encouraged with our profitability progress, this lower bookings performance in TEMS has a near-term impact on our Q4 and 2024 revenue. In terms of our adjusted gross margin, we anticipate our Q4 adjusted technology gross margin will be roughly in line with Q3 performance as we continue to focus on migrating our clients from DOS to Ignite and as Ninja Universe costs continue prior to revenue recognition. In the Professional Services segment, we anticipate that our Q4 adjusted Professional Services gross margin will be down compared to Q3, 2024. Some of this decline relates to incremental resourcing of TEMS, specifically for ambulatory operations. Additionally, similar to prior years, there is some seasonality in expenses such as medical claims, which hits disproportionately in Q4. We anticipate this professional services gross margin performance will improve moving into Q1 2025. As it relates to our operating expenses, we expect to continue to see material operating leverage moving forward and generally anticipate that quarter-over-quarter performance in our operating expense categories will be roughly flat compared to Q3, 2024. We are very encouraged with our profitability progress thus far in 2024, which informed our decision to raise our expectations for adjusted EBITDA for 2024. Additionally, we are encouraged that through Q3 2024, our operating cash flow was $18.1 million, and we anticipate our adjusted free cash flow will be meaningfully positive in 2024 and in 2025. This is a testament to our commitment to financial discipline, operating leverage, and profitable growth. 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 dedication and contributions to these results and this progress, as well as express my optimism for our future. And with that, I will turn the call back to the operator for questions.

Certainly. The floor is now open for questions. Our first question comes from Jared Haase with William Blair. Please go ahead.

Yes. Jared Haase here. On for Ryan Daniels from Blair. Thanks for taking our questions. Maybe I'll ask one just on the outlook here and kind of the setup for 2025 and a return to double-digit growth. Obviously, you mentioned a couple of times in the prepared remarks kind of the importance of the fourth quarter here as a bookings period to set up next year's performance. I was just hoping to hear a little bit of color around, I guess, what you're seeing in the pipeline, how those sales opportunities are progressing today sort of relative to what you need to hit that double-digit growth profile in 2025?

Yes. Thank you for the question, Jared. So, happy to talk about those three building blocks as we see them playing out and contributing to that growth profile in 2025 that we did reiterate confidence in achieving. So, the first is our new client additions. And as we mentioned in the prepared remarks, we're on track for in that particular metric, what would be the best year in Health Catalyst history in terms of the net new logos that we add and that new platform subscription clients that we add in the low 20s. We also shared that average ARR range, ARR plus NR range of between $400,000 and $1 million on average that would then contribute to that first building block of growth. And we feel good about where we are year-to-date. We feel good about the pipeline that we have, and we're excited to execute well against that pipeline. So that's the first building block. The second building block is expanding with our existing clients. We're pleased to see continued strength and progress as it relates to our gross client retention rates with churn levels coming down this year meaningfully relative to last year. And we're encouraged to see meaningful expansions happening, particularly in areas that are higher profit margin within our pipeline and our portfolio, including tech expansions with existing clients; those non-recurring contracts that are being signed as part of expansions; those non-recurring contracts do fall outside of the current definition of dollar-based retention, but nonetheless do directly contribute to that existing client expansion as the second building block of our growth moving forward. And we feel good and that informed our reiteration of that second metric as well coming into the end of the year here. And then the third building block of growth is our inorganic activities. And while each individual acquisition that we've now announced throughout 2024 has been small and contributes immaterially on its own from a revenue perspective, those new applications, those new solutions go into our growth engine. And in particular, cross-sell engine that has proven to be very efficient and very productive and effective where we see a conversion rate that's more than double the conversion rate when we're cross-selling to an existing client where we have a relationship. And when we're selling at the app layer, that's among the highest profit margin aspects of our portfolio. So, you get a double benefit in that third building block of growth, a smaller benefit initially as it relates to any individual acquisition from a revenue contribution, but it flows into that growth engine of cross-sell, which is so effective for us. Those three building blocks will contribute to that return to double-digit top-line revenue growth in 2025, and we feel good about where we are. As is always the case, Q4 is always an important quarter, but we're encouraged by the pipeline that we have by the progression within that pipeline, and that informed our decision to reiterate that confidence level in a return to double-digit revenue growth for next year.

Perfect. That’s super helpful and appreciate all the color.

Thank you. We'll take our next question from Elizabeth Anderson with Evercore ISI. Please go ahead.

Hi, thanks for taking the question. This is Joanna for Elizabeth. So I guess my question is, looking to 2025, are you expecting a similar bookings mix in 2024, like with more bookings coming from international and information exchange customers relative to the traditional health care system base? Thank you.

Yes. Great question. So, we are encouraged to see some really strong performance year-to-date in 2024. Among those two groups, our international growth opportunities as well as our health information exchange growth opportunities. And those are meaningful expansions. They tend to be higher profit margin expansions, where there's a high proportion of that revenue base that is technology revenue, which we really like. One of the dynamics that is a little bit more challenging, at least in the near-term, is those implementations tend to be a little bit more complex, a little bit more involved. That's more of a near-term challenge. And once we get through that initial implementation, then those clients will behave in many of the same ways as our other clients in terms of their predictability. Those are recurring revenue relationships. And so they contribute to the business model overall Health Catalyst of 90%-plus of our revenue being recurring in nature, and therefore, we have a lot of visibility. Now, as I think about 2025 moving forward, I will share with you, we're encouraged to see a meaningful pipeline of both international opportunities and health information exchange opportunities, among other meaningful opportunities that we see in our pipeline. And we're encouraged to see some pretty meaningful market leadership in the health information exchange space. We want that to continue. Absolutely, which brings a little bit of a near-term complexity in terms of those initial implementations but brings lots of long-term advantages and lots of similarities to the advantages of the rest of our business in terms of that recurring revenue sticky, really fundamentally important solution set that we're providing that tends to skew a little bit more towards technology revenue.

Thank you. We will take our next question from Jessica Tassan with Piper Sandler. Please go ahead.

Hi everyone. Thank you for taking my questions. You've mentioned a few points of growth in 2025 related to one-time or non-recurring services contracts. Can you clarify whether these are associated with existing customers or new customers? Additionally, should we consider these as international implementations? If so, that makes sense to me. In these international deals, are you offering the software along with services, or are they strictly software contracts by implementation? Thank you.

Yes, great question, Jess. So, as it relates to the first question, those non-recurring services contracts skew very heavily towards existing client relationships. And they include existing client relationships in the U.S. and internationally. We've really seen an expansion of those non-recurring contracts really related to ongoing initiatives that are focused on clinical, operational, and financial improvements. And we found that clients appreciate the budget structure of a non-recurring contract that has a starting point and an ending point, it's easier to get those approved internally because they have a starting point and an ending point and a finite number of dollars that we're asking for. And we prefer it because we see our clients continuing to stack more and more of these non-recurring contracts on top of each other, such that there's a component of ongoing spend that is recurring even though the contract structure itself is not recurring. So, it is a meaningful expansion that's not just one-time in what we're observing even though the contract structure is non-recurring in its nature. So, we're seeing it across U.S. as well as international and we are seeing it as an important complement to our technology revenue that, that services piece is often accompanying. In most cases, there is a services component that's accompanying the tech revenue contracts that we're signing.

Thank you. We will take our next question from Stephanie Davis with Barclays. Please go ahead.

Hi guys, this is Anna Kruszenski, on for Stephanie. I was hoping to be more about enterprise acquisition. And while we know that there is cybersecurity demand given all the breaches in this year, could you talk more about what synergies the asset has with Health Catalyst's core platform and value proposition? Thank you.

Thank you for the question, Anna. One of the consistent themes we focus on at Health Catalyst is listening to our clients and having ongoing discussions about what matters most to them. Security is a top priority for virtually every CIO and CISO we engage with. This concern has only intensified due to recent incidents over the past nine months. Therefore, it is a significant focus for our health system clients and a crucial area of need. For many years, we have been asked to demonstrate our strength and reliability in security as it relates to Ignite and previous iterations of our data platform. We have built a strong long-term track record and have made substantial investments in our infrastructure. This led us to consider more broadly what our clients were asking, typically in two parts: first, they wanted to know how well our security infrastructure supports our solutions; and as their confidence grew, they began asking if we could help them enhance their own infrastructure. This prompted us to recognize this as an area where we could add value and strengthen our existing relationships with clients, offering technology and services that provide robust security and necessary certifications. This, in turn, helps our clients build trust and strengthen their relationships with their members and patients, showing that they are making the right investments in this vital area. It can be challenging for health systems to handle this independently. As we explored this opportunity, the response was very positive, guiding us strategically to prioritize this area. We are excited to offer this to our clients who already trust Health Catalyst and recognize our strength in maintaining a secure infrastructure for our data and analytics platform, allowing us to effectively help them enhance their own certification and risk management efforts.

Yes. And just one comment, Anna, from a financial synergies standpoint, we did mention in the prepared remarks that the revenue contribution related to this acquisition is expected to be immaterial. But one area where we do focus as we're looking at these acquisitions is bringing these targets over at or near adjusted EBITDA breakeven. That does give us opportunity as the company grows and as we are able to cross-sell and improve that sales motion. It gives us opportunity to improve that EBITDA profile.

And just to that point, thanks for bringing that up, Jason. The two areas where we've most commonly found meaningful cost synergies as we have pursued these combinations that we've discussed in the past are in the R&D and in the sales and marketing line items. And from an R&D perspective, we really appreciate, and this is the case with Intraprise that they have invested meaningfully in developing the technology components of their solution, and it's well built, and it's very positive. We think there's leverage there and synergy there moving forward. And secondly, from a sales and marketing perspective, the fact that we have over 600 existing client relationships and a cross-sell motion that we have is so efficient. It's so much more productive and efficient than knocking on the door from the outside. And so we can leverage that more efficient motion from a cross-sell engine perspective that often provides meaningful sales and marketing leverage as well. And that's part of that integration playbook that we talked about in our prepared remarks that over time, we've gained increased confidence that we can execute well against that integration playbook and really see these acquisitions not only contribute to our growth engine, but also contribute to our profitability engine.

Thank you. We will take our next question from John Pinney with Canaccord Genuity. Please go ahead.

Hi, John Pinney on for Richard Close. Thanks for the question. So, I guess you mentioned in the prepared remarks that there's some elevated costs related to TEMS contracts. And I just wanted to get some clarification there. Is that just a one-time cost for near-term to throw some additional resources? Or is this like something that could potentially be longer-term higher costs? And could you comment higher level about how gross margin expansion is going at the installed TEMS base?

Thank you for the question, John. We are encouraged to see significant margin improvement in our core tech-enabled managed services, including chart abstraction and low-level data management and analytics, areas where we have extensive experience with clients. We've identified meaningful efficiencies and developed a playbook that leverages technology, pooled resources, and process enhancements. We are optimistic about our experienced areas. Additionally, we are exploring ambulatory operations, where we are still gaining understanding. While we are pleased with some initial operational improvements from our client partnerships, we are addressing cost structure concerns. This segment is smaller and new for us, and we are in the early stages of our experience there. Our priority has been to ensure that our solutions deliver real value to our clients, and we will continue to learn. However, in the areas where we have substantial experience, which make up the majority of our TEMS solutions and client relationships, we are seeing positive progress, including benefits from AI and encouraging cost structure improvements, particularly in chart abstraction.

Thank you. We will take our next question from Daniel Grosslight with Citi. Please go ahead.

Hey, this is someone on for Daniel. I have a quick question. Some facilities have closed and other options have come up. You previously mentioned that default functions assume continued revenue from Steward. Are there any updates on expectations? How should we consider the impact of Steward? Thank you.

Yes. I'll share a few thoughts, and then Jason can add his insights. We are fortunate and grateful to have received significant positive updates regarding Steward, which has successfully sold some important ambulatory assets. Health Catalyst managed to transfer that client relationship, and we were recognized as a key partner. As a result, we received full repayment of all outstanding amounts. From a strategic viewpoint, this highlights the essential role of the solutions we provide, particularly with Steward Health's Ignite data platform infrastructure. This supports critical solutions like measures and registries that significantly impact incentive payments tied to quality measures and performance. The complexity of delivering these measures accurately, with the appropriate data and domain expertise, ensures qualification for those incentive payments and contributed to the positive outcome we experienced. We are truly thankful for this example of how vital our solutions are, especially for Steward Health even amidst a challenging financial landscape, and that we received complete repayment of all dues. Jason, what would you like to add?

Yes, I appreciate the question. We have worked hard to be a strong partner for Steward over the years, especially during these challenging months related to the bankruptcy process. As Dan mentioned, our contract has been assigned to a new party, and we are excited about that relationship and the continuation of service. Therefore, we have kept the expected revenue from that ongoing contract in our guidance and future expectations. We will address the impact of repaying the prepetition or pre-bankruptcy receivables balance in our Q4 financial statements.

Thank you. We will take our next question from Sean Dodge with RBC Capital Markets. Please go ahead.

Hey, good afternoon. This is Thomas Kelliher on for Sean. Thanks for taking the questions. Just wanted to follow up on Tim's question earlier. Can you give us any indication of the size of the potential like incremental EBITDA dollar contribution remaining within existing clients as these newer contracts kind of ramp to those mature target margins? Thanks.

Yes, I'm happy to share some insights, and Jason can add his thoughts as well. As we've mentioned before, starting a TEMS relationship usually begins with a gross margin around 0%. Over time, as we implement technology that automates previously manual processes and achieve other efficiency improvements, we observe the gross margin increasing from that initial 0% toward our target margin of 25%. This was the case prior to any of the recent innovations related to AI that we're pursuing. We've previously mentioned that implementing AI for chart abstraction efficiency gains can lead to an additional 20% to 25% improvement. This would enhance our long-term gross margin goal of 25%, but we are still in the early stages of this implementation. Most of our AI applications are focused on chart abstraction, which is only a part of our overall TEMS footprint, but it's promising to see progress. We are on track with the analytics we've developed across client relationships, showing a gradual increase in gross margin from the initial 0% to the mid-20s over the third, fourth, and fifth years of the partnerships. Jason, do you have anything to add?

I think you covered it well, Dan. The only thing I would add is we are still early on those, as Dan mentioned in the previous question, are still early and still learning as it pertains to the ambulatory TEMS relationships. We did have some incremental resourcing and investment in Q3, which put a little bit of pressure on our professional services gross margin in our third quarter.

Thank you. We will take our next question from David Larsen with BTIG. Please go ahead.

Hi, Dan. Can you give an example or two of what you're seeing in the broader market? It sounds like demand is picking back up. Just any thoughts around labor constraints that may be improved, the impact of inflation. And any thoughts on the election here would be great? Thanks very much.

Yes, thank you for the question, David. We are seeing overall improvement returning to pre-pandemic levels of normalcy in our operating margins. The factors you mentioned, particularly labor constraints and inflation, are becoming more manageable for our clients. These two areas are closely related and show significant improvement, with inflation rates decreasing from low double digits to low single digits, which greatly impacts the bottom line for many of our clients. While our clients vary widely, the majority are in a positive operating margin situation, often in alignment with external reports like the Kaufman Hall monthly report, indicating healthy operating margins of 3%, 4%, or 5%. This is particularly solid for not-for-profits, allowing them to focus on their future and consider innovations in technology and AI. We are encouraged to see many clients looking to leverage the scalability of Ignite for AI-based use cases that might require more significant resources. Regarding the election, the healthcare sector, particularly the data, analytics, and technology infrastructure we operate within, was not a major focus for either candidate, so we do not expect significant impacts in the near to midterm. Daniel, would you like to add anything regarding the Ignite migrations?

You brought up, Dan, the excitement and enthusiasm around some of the emerging use cases around AI and a lot of our application-oriented solutions kind of tap into that capability, which and we're seeing increased demand and interest in that. And so that's kind of an exciting tailwind for us as we think about our modular capabilities with Ignite, enabling those types of use cases. So, yes, I think that was well said.

Just one more quick follow-up. For 2025, what are your EBITDA expectations? Or what sort of rough estimate can be used for margin expansion? It seems like your service gross margin has improved a bit. Any thoughts on margins for 2025 would be appreciated. Thank you.

Thank you for the question, David. We remain confident in our ability to achieve significant progress in our EBITDA. We are pleased with the company's historical performance over the past several years, consistently showing notable EBITDA improvements of 400 to 500 basis points annually. This year, we anticipate another substantial year-over-year increase, projecting an additional $1 million in EBITDA at the midpoint, equating to over 135% growth compared to last year. Even with this upward adjustment to our guidance, we believe we can grow EBITDA by approximately 50% next year based on a $26 million starting point. Our confidence stems from several factors, including gross margin leverage. We expect meaningful technology growth to resume, as indicated by our Q3 results. We are seeing an upward trend in the latter half of this year compared to the first half, particularly with our tech growth surpassing overall company growth, which is encouraging. We expect this trend to continue into 2025, resulting in a greater emphasis on technology that will positively impact our overall gross margins. Moreover, we have executed well in achieving operating leverage over the years, driven primarily by R&D and sales and marketing efforts. In R&D, we are successfully expanding our offshore capabilities, particularly in our India office, which has become one of our fastest-growing areas. We plan to continue investing in this area, which should provide substantial operating leverage. For sales and marketing, our cross-selling strategy has proven to be highly productive, especially as we acquire new clients and nurture existing relationships. Our cross-selling efforts have been shown to be over twice as effective compared to cold outreach, contributing to significant leverage in this area. Each of these factors demonstrates our ability to execute effectively, reinforcing our confidence that we can raise our EBITDA guidance this year while still targeting another 50% growth next year. Would you like to add anything, Jason?

Yes. Yes, I was just going to tag on with that last point, Dan. It is important to note that we are still expecting to grow adjusted EBITDA by roughly 50% even after the raise on our adjusted EBITDA range by $1 million on both the bottom end and top end. Then the other thing I would note, Dave, is we do anticipate providing additional gross margin color in early 2025.

Thank you. We will take our next question from John Ransom with Raymond James. Please go ahead.

Hi, good evening, afternoon. I've always believed that technology is sold, not bought. We've experienced various cycles, from face-to-face interactions to Zoom meetings, and now we find ourselves in a hybrid world. As you bring on a new sales representative or engage with your team in the field, what does your current approach to meeting with customers look like in this hybrid environment?

Yes, it's a great question, John. Hybrid is a good word for it. I think we have realized that as we came through the pandemic, we have really missed that opportunity to have those face-to-face interactions. And so I think that, coupled with the extreme financial pressure because of inflation that our health system clients found themselves in, we did a lot of face-to-face work. And we continue to do meaningful face-to-face work with our clients, made a lot of progress there in the back half of 2022 and throughout 2023. We found a good rhythm at Health Catalyst in that hybrid model, where I think having at least a quarterly opportunity with our larger clients to be together face-to-face is really positive. And we use the structure of a quarterly business review with them, to truly sit down and be in the same room and talk about what we've accomplished over the last quarter together, how we've measured the value of what we've accomplished together, and what we're planning to move forward with. That's a very helpful face-to-face series of discussions that deepens the relationship. I think in between those quarterly sessions, we found a really good cadence and rhythm in following up virtually with regular contact, regular discussion about how those initiatives are going. And I would also share back to some of our earlier commentary, we found that leveraging and just strengthening those existing client relationships of whatever kind we have, even when they're small app layer relationships, in that cross-sell motion is really, really effective. And so we're focusing more and more of our investment because it's so efficient and so effective in that cross-sell motion. And again, there's a rhythm there of quite a bit of work that we can do really effectively virtually, and then maybe on a quarterly cadence, have a face-to-face component that also strengthens.

So, Dan, let's say it's a large system, you don't have a relationship with. Where do you get that lead now? Is it word of mouth? And then what are you leading with now as the hook? And then conversely, let's take a long-standing relationship. What are you doing for a longer-standing customer today versus where you started?

Yes, those are two excellent questions, John. Regarding a large system with which we don't have a relationship, that situation is becoming increasingly rare. As we have expanded our installed base through both organic growth and acquisitions, we have established connections with the majority of the top 100 and top 200 healthcare organizations. This places us in a stronger position. Our goal is to continuously improve. Many of these connections exist only at the application level, so we aim to enhance our understanding of the use cases closely related to the apps they have already acquired. For instance, if you are a Vitalware client utilizing our RevCycle Chargemaster Management Solution, we want to effectively pivot and discuss labor management within the finance function as it relates to cost management. We want to emphasize how we can integrate this in a beneficial manner, helping those involved demonstrate the return on investment of these solutions to the CFO. Thus, focusing on this cross-sell approach is critical. This strategy applies similarly to long-standing relationships since we have more topics to discuss and more leverage points. For instance, our Ignite clients often use one, two, or three applications, providing us with several natural cross-sell opportunities. This creates more opportunities for face-to-face interactions where we can explore multiple expansion options, unlike a client with a single-app relationship, where the scope is more limited initially. Well, I would have told you security three to six months ago, John. And I think we're really excited because that always comes up. We try to be good listeners with our clients, and in those quarterly business reviews, we always have a segment where we're just listening. Like what keeps you up at night? Security was always on that list. And again, there was a natural strength that we had where our own security infrastructure was really solid, but we didn't have an offering for our client to purchase. And so we're excited to have that adjacency now that we can talk with clients about.

Thank you so much, Dan.

Thank you, John.

Thank you. We will take our final question from Scott Schoenhaus with KeyBanc.

Thank you. And I'll be brief here. Dan, I think you mentioned in your prepared comments that you're actually being choosy within your pipeline. You focused on higher-margin tech business versus lower-margin services business. Just trying to think about how that plays out into 2025 if these end markets continue to be strong and healthy demand for your Ignite platform. You mentioned old revenue growth in that technology could end up being more of a higher growth part of that algorithm. Just trying to think if you can choose your pipeline, which projects to go after, does that mean we could really see much higher elevation in tech growth versus services for next year?

Yes. Great comments and questions, Scott. I think you're right, and that's how we think about our growth. Of course, we always want to meet clients where they are, every solution that we sell, we always want to have a really meaningful, measurable ROI. But if there is an opportunity and there's an openness across our portfolio of offerings, when we're sitting down in that quarterly business review, we would prefer to be talking about the higher-margin parts of our portfolio. And in some cases and in some financial environment, that full portfolio isn't open. And that was true in the back half of 2022, that was true for a lot of 2023. At that point, I was really grateful that we had other parts of our portfolio that offer that near-term hard dollar guaranteed cost savings so that there was something for them to buy. Now, that tended towards TEMS, for example, and a few other parts of our portfolio, and a lot of other parts of the portfolio that just wasn't an openness or an ability to really consider. So, we're really grateful to be back to a more normal full portfolio discussion. And we are choosing to prioritize those areas that are most profitable, and of course, that also provide a great ROI to our clients. But that's one of the reasons why we've seen overperformance in areas like tech expansion within our existing client base or areas of new logo additions, which really means can be an existing client that was just at the apps layer that is now adding Ignite and meaningfully expanding in that way. Those all skew towards more tech. And to your point, you're starting to see that play out from pipeline onto the P&L where in Q3, for example, we shared an overall growth rate. But our tech grew faster than that overall growth trajectory. I think that will continue in Q4, and it could likely continue through into 2025. We like that. That's a tailwind for us then from a gross margin mix perspective. It's going to provide more of an opportunity for that profitable growth, more of an opportunity for us to get ahead of schedule like we are this year as it relates to our EBITDA performance. And we believe that drives a lot of fundamental shareholder value.

Thank you.

Thank you, Scott.

Thank you. We will take our final question from Stan Berenshteyn with Wells Fargo. Please go ahead.

Hi, thank you for accommodating me. I wanted to follow up on the comments about the growth in new clients. Aside from the timing-related impacts mentioned earlier, how should we expect the go-live timelines for these clients? It looks like we're expecting about twice as many clients as last year. Are there any updates on the timing or pacing of the go-lives? Thank you.

Yes. Good question, Stan. So, I think one of the factors that we have spoken to in 2024 has been we performed really strongly as it relates to the health information exchange market. Now, that has manifested both on the new client side as well as some existing client expansions as well. Those implementations do tend to take a little bit longer and be a little bit more complex when we have a meaningful new client or a large expansion. So that has been factored in 2024. I hope that, that continues that we continue to dominate that subsegment of the market. And so that would and could be a component to the way that we think about and plan for 2025. Now, that tends to be a near-term element where getting to a go-live is one near-term dynamic that affects revenue. But then once we're live, it's recurring revenue ratably recognized much like the rest of our business. And so then it becomes very, very predictable and easier to manage and understand. So, I don't think it's a material significant impact. And even as we've seen an overrepresentation, a little higher performance than what we had forecasted in that subsegment of our overall portfolio, our pipeline we still see the same dynamics of over 90% of our revenue being recurring in nature, which enables us to have a lot of visibility as to how we see that revenue ramping and displaying throughout the P&L going into next year. So, we still feel a lot of confidence in how we think that will play out. There is a bit on the margin. And that's where you see a little bit wider range to our Q4 revenue guide and our full-year revenue guide just because we have a little more in terms of our implementation work than we normally do of those more complex implementations. Anything you'd add, Jason?

Yes, the only thing I would add is the timeline to deploy a standard Ignite deal is shorter. Then these health information in universe types of deals, but it would typically take us a couple to a few months to deploy an Ignite deal and ramp that into revenue. So, depending on timing of deal closures, that will impact that revenue ramp going into 2025.

And I would also just share as a final comment, we continue to try to keep the focus on making sure that those implementations go really, really well. And we don't want to artificially rush an implementation. And so if in the spirit of the client relationship, it makes more sense for us to take a few extra weeks. And that means some of that revenue pushes into the next quarter. We think that's the right trade to keep the focus on the client relationship. We'll still recognize that revenue. And then after that implementation is complete, that revenue becomes very predictable and very smooth. But we want to make sure that our clients feel great about those complex implementations. So that will continue to be a North Star for us.

Great. Thanks for the color.

Thank you, Stan.

There are no further questions at this time. I'll turn the floor back over to Dan Burton for additional or closing remarks.

All right. Thank you all for your continued interest in Health Catalyst. We appreciate this opportunity to provide you an update and look forward to keeping in touch in the future. Take care everyone.

Thank you. This concludes today's Health Catalyst third quarter 2024 earnings conference call. Please disconnect your lines at this time and have a wonderful day.