Health Catalyst, Inc. Q1 FY2026 earnings call

• Company Transformation & Restructuring

  • The company conducted a full business review, identifying that the prior rigid one-size-fits-all DOS to Ignite migration timeline created significant churn that is impacting 2026 revenue. Management has completed a line-by-line client review, developed tailored migration plans, extended DOS availability for interested clients, and strengthened client success and retention teams.
  • Project Nexus, a comprehensive operational and business restructuring initiative, was launched to simplify the organizational structure, align resources around high-priority technology opportunities, and improve the company's cost structure. The initiative is expected to deliver $30 million in annual run-rate cost savings, with $22 million in direct savings from a 9% headcount reduction and reduced non-headcount spend, and $8 million in indirect savings from closing open headcount and canceling planned expenses.
  • Significant leadership changes have been made: new chief marketing officer, new chief growth officer, and four new board members (including a new chair) have joined in the past year, bringing fresh perspective and deep healthcare industry expertise.
  • An AI-powered agile development pod model has been piloted, doubling developer output per person, allowing cost restructuring and accelerated product innovation simultaneously.
  • A new simplified performance metric, total bookings, has been introduced at the request of investors to better track commercial engine performance.

• Core Market & Competitive Positioning

  • Healthcare systems face structural financial pressure (eroding margins, rising labor costs, shifting payer mix) that creates demand for partners that can deliver meaningful cost reduction, improved clinical quality, and consumer growth, a market Health Catalyst is positioned to serve.
  • Healthcare data infrastructure has become commoditized; durable competitive advantage now comes from domain-specific intelligence built on top of infrastructure. Health Catalyst's 18-year proprietary dataset of improvement outcomes (linking interventions to cost and clinical results) cannot be replicated by new entrants and creates a sustainable competitive moat.

• AI Strategy

  • The company is building a suite of agentic AI models across cost management, clinical quality, consumer experience, and ambulatory growth, embedded directly in domain-specific applications. These AI agents combine machine learning and large language models to identify, prioritize, and guide execution of high-impact improvement opportunities for health systems, turning months of manual consulting work into automated, continuously updated technology.

Total revenue for Q1 2026 was $70.8 million. The Technology segment generated revenue of $49.5 million, accounting for 70% of total revenue, with an adjusted gross margin of 65.3%. The Professional Services segment generated revenue of $21.3 million, accounting for 30% of total revenue, with an adjusted gross margin of 19.4%. Adjusted gross margin for the company overall was 51.5% in Q1 2026, up from 49.2% in Q1 2025.

• Full year 2026 guidance is set at $260 million to $265 million in total revenue, and $30 million to $33 million in adjusted EBITDA. Q2 2026 guidance is $68 million to $70 million in total revenue, and $9 million to $10 million in adjusted EBITDA.
• Full year 2026 total new bookings are projected to be $22 million to $26 million. Bookings typically convert to revenue within 3 to 6 months, depending on the specific solution or project.
• Adjusted technology gross margin is expected to finish 2026 in the mid-60% range, while adjusted professional services gross margin is expected to end the year in the mid to low teens.
• Quarterly adjusted operating expenses are expected to decrease by $3 million to $4 million compared to Q1 2026, and quarterly adjusted cost of revenue is expected to decrease by $1 million to $2 million, with these savings starting in Q2 and ramping throughout 2026.
• Of the previously identified $52 million in at-risk ARR from the DOS to Ignite migration, management now expects to retain at least $22 million, leaving $30 million of at-risk ARR. The expected revenue impact is ~$20 million in 2026 and ~$10 million in 2027, and management expects to absorb the majority of migration-related revenue pressure in 2026.
• Management expects the annual revenue of the professional services segment to fall to between $55 million and $65 million exiting 2026 as the company shifts to a higher-margin, technology-led business model.
• Management expects to be largely through migration-related revenue strains by the end of 2027, entering 2027 with a more efficient organization and aligned commercial engine for long-term profitable growth.

• Prior rigid one-size-fits-all DOS to Ignite migration timelines created client churn and downsell that creates material short-term revenue pressure in 2026 and 2027.
• Duplicate hosting costs during client migration to Ignite and high data loading costs for new HIE client deployments suppress adjusted technology gross margins in the near term, and margin expansion will take time to be fully reflected in financial results.
• Healthcare system clients have a higher ROI threshold for new technology purchases in the current pressured operating environment, which can slow sales cycles and booking momentum.
• The majority of Project Nexus restructuring cost savings will not be fully realized in 2026, as the restructuring ramps through the year and annual run-rate savings take full effect after 2026.

Q: With the company's new focus on the technology business, will value-added professional services be phased out, or will they remain part of the company's offerings going forward? / A: Management expects services to shrink as a percentage of total revenue as the company shifts focus to higher-margin technology opportunities. However, targeted value-added services (such as wraparound support for AI-enabled chart abstraction work) will remain to meet client needs, aligning with the company's strategy of meeting clients where they are. This intentional mix shift supports the company's long-term margin improvement goals.

Q: What has caused client hesitation to migrate from DOS to Ignite, and what value do clients see in remaining on DOS? / A: Clients have already made significant long-term investments in DOS, which continues to deliver substantial value to users. Migrating to a new platform requires major operational effort from clients, so many prefer to remain on DOS for an extended period. Management has adjusted the migration strategy to accommodate this preference, rather than forcing a rushed transition. The core value of Ignite comes from its AI capabilities built on top of the platform, driven by Health Catalyst's unique 18-year improvement dataset, and management expects more clients to migrate over time as these AI capabilities expand.

Q: What customer feedback have you received on your new Ignite Intelligence AI offerings, and how do you compete against custom-built or third-party AI solutions? / A: Early customer feedback on the company's AI capabilities, particularly for cost management use cases, has been very positive in early rollouts. Health Catalyst's unique competitive advantage is its 18 years of proprietary improvement data from thousands of client engagements, which links interventions directly to measurable cost, clinical, and operational outcomes. This dataset cannot be replicated by new entrants or general-purpose AI vendors, and it enables the company's AI agents to deliver more robust, relevant value to healthcare clients, which management expects to drive future growth.

Q: What delineates the $22 million of at-risk DOS migration ARR you expect to retain versus the $30 million that remains at risk, and what are you doing to retain as much of the remaining at-risk ARR as possible? / A: Management conducted a full line-by-line review of every at-risk DOS client to develop tailored retention and migration plans for each account. Some at-risk clients will downsize their arrangement rather than churn entirely, and management continues to work aggressively to retain as much of the remaining $30 million at-risk ARR as possible through dedicated account-level support. Management provided transparent guidance for the expected loss to set appropriate market expectations, but remains focused on minimizing churn through the revised client-centric migration approach.