Health Catalyst (HCAT) Q3 2025: Technology Gross Margin Rises 330bps as Ignite Migration Flexes Business Model
Health Catalyst’s Q3 revealed a pivotal margin expansion in its technology segment, even as revenue growth plateaued and migration to Ignite slowed at client request. The company is balancing disciplined cost cuts, targeted investments, and a more flexible client approach as it navigates a complex healthcare IT market. Early 2026 signals point to ongoing EBITDA gains but tempered top-line growth, with operational strategy shifting toward client-centricity and high-ROI use cases.
Summary
- Margin Expansion: Technology gross margin improvement signals operational leverage from platform migration and cost actions.
- Migration Flexibility: Leadership is prioritizing client choice over forced Ignite adoption, aiming to preserve retention.
- 2026 Caution: Revenue growth will slow, but EBITDA is expected to advance as cost discipline continues.
Performance Analysis
Health Catalyst delivered Q3 revenue of $76.3 million with flat year-over-year growth, but the real story was in margin expansion and segmental mix. The technology segment, which now accounts for roughly two-thirds of total revenue, grew 7% year-over-year to $52.1 million, driven by recurring contracts from new and acquired clients. Professional services revenue declined 12% as the company exited low-margin TEMS, technology-enabled managed services, contracts and shifted to project-based work.
Adjusted gross margin rose to 53%, up 510 basis points year-over-year, highlighting the impact of restructuring and a richer technology mix. Technology gross margin reached 68%, up 330 basis points, while professional services gross margin also improved. EBITDA of $12 million exceeded guidance and grew 64% year-over-year, underscoring success in cost management and focus on higher-value offerings.
- Technology Margin Upswing: Segment gross margin gains reflect migration efficiencies and disciplined cost structure.
- Services Rationalization: Proactive pruning of unprofitable contracts is shrinking services revenue but boosting profitability.
- Non-Recurring Revenue Impact: Q3 benefited from one-time items, especially in professional services, that will not recur in Q4.
Cash burn accelerated due to convertible note repayment, but the company maintains a healthy liquidity position and is not signaling capital constraint for operations or selective investment.
Executive Commentary
"We continue to expect approximately 30 net new platform client additions for 2025. As a reminder, Q4 is often a very active quarter in terms of bookings and contract renewals. We also continue to expect our average booking size for net new platform clients in 2025 to be towards the lower end of the 300K to 700K range previously provided."
Dan Burton, Chief Executive Officer
"Our Q3 2025 adjusted technology gross margin was 68%, an increase of approximately 330 basis points compared to the same period last year, and generally in line with previously shared expectations of one to two points of margin improvement quarter over quarter."
Jason Alger, Chief Financial Officer
Strategic Positioning
1. Ignite Migration Strategy: Client-Centric Flexibility
Health Catalyst is pivoting from a rigid Ignite-only migration stance to a more flexible, client-driven approach. Leadership acknowledged that many clients prefer to stay on DOS, the legacy data platform, due to competing priorities and budget constraints. This flexibility is intended to improve dollar-based retention, even as it slows Ignite adoption. The company expects two-thirds of DOS clients to migrate by end of 2025, with the remainder given leeway into 2026 and beyond.
2. Margin Focus and Cost Discipline
Restructuring and contract rationalization are central to the company’s margin improvement story. Exiting low-margin TEMS contracts and shifting professional services to project-based engagements have directly lifted gross margin. Further, leveraging India operations and integrating AI into internal workflows are expected to drive ongoing operating leverage into 2026.
3. Application Layer Growth and ROI Emphasis
Leadership is doubling down on high-ROI, application-layer solutions—such as Power Costing, POP Analyzer, and Power Labor—that directly address cost control and operational efficiency for health systems. These offerings are increasingly sought after in a cost-constrained hospital environment and are positioned as the primary growth vector, even as platform revenue faces migration headwinds.
4. Capital Allocation: Pause on M&A, Focus on Organic Leverage
With recent acquisitions integrated, the company is pausing further M&A and concentrating on extracting value from its current portfolio. The goal is to drive both growth and profitability from existing and recently acquired assets, rather than pursue new deals in the near term.
5. Early AI Monetization and Mid-Market Channel Expansion
AI-enabled solutions and partnerships with Microsoft and Databricks are beginning to open new channels, particularly for smaller deals and mid-market clients. While still early, these partnerships are seen as a lever for incremental growth and market reach at lower price points.
Key Considerations
This quarter was defined by a strategic shift toward client flexibility, margin discipline, and prioritization of application-layer growth over platform expansion. The company’s approach reflects a nuanced understanding of current healthcare provider constraints and aims to balance retention, profitability, and future growth potential.
Key Considerations:
- Retention Headwinds: Dollar-based retention is under pressure as clients defer Ignite migration, impacting near-term recurring revenue.
- Revenue Mix Shift: Technology revenue is becoming a larger share of the total, but overall growth is muted by professional services contraction.
- Pipeline Dynamics: Deal sizes are smaller and sales cycles less predictable, but the pipeline remains active, especially for cost management solutions.
- Operating Leverage: Cost actions and India operations are expected to drive further margin gains in 2026, even as revenue growth slows.
- AI and Partnerships: Early-stage monetization of AI and channel sales through Microsoft and Databricks offer optionality but are not yet material contributors.
Risks
Revenue growth will remain constrained in 2026 due to migration delays, smaller deal sizes, and ongoing pressure on hospital budgets. Retention could deteriorate if clients’ priorities shift further or if Ignite’s value proposition weakens. Execution risk is elevated given the need to balance flexibility with profitability, and non-recurring revenue in Q3 highlights some volatility in reported results.
Forward Outlook
For Q4 2025, Health Catalyst guided to:
- Total revenue of approximately $73.5 million
- Adjusted EBITDA of approximately $13.4 million
For full-year 2025, management reaffirmed guidance:
- Total revenue of approximately $310 million
- Adjusted EBITDA of approximately $41 million
Management highlighted several factors that will shape 2026:
- Revenue performance is expected to be “a few points lower” than 2025 due to retention and migration headwinds.
- EBITDA is expected to improve, supported by restructuring, cost optimization, and mix shift to higher-margin offerings.
Takeaways
Health Catalyst is prioritizing margin and client retention over aggressive top-line growth as it navigates a challenging healthcare IT market.
- Margin Expansion: Technology segment margin gains and cost discipline are offsetting muted revenue growth and retention headwinds.
- Strategic Flexibility: Allowing clients to stay on DOS is a pragmatic move to preserve relationships and enable future upsell opportunities.
- 2026 Watchpoint: Investors should monitor the pace of Ignite migration, pipeline velocity for high-ROI applications, and the materiality of new channel partnerships.
Conclusion
Health Catalyst’s Q3 marks a strategic inflection toward client-centricity, margin discipline, and operational leverage, with management signaling a more measured growth trajectory for 2026. The ability to preserve retention and monetize high-value applications will be decisive for long-term upside.
Industry Read-Through
Health Catalyst’s results underscore a broader trend in healthcare IT: Providers are prioritizing cost control and operational efficiency over large-scale platform upgrades, especially amid budget pressures and regulatory uncertainty. Vendors with flexible migration paths and demonstrable ROI at the application layer are best positioned. The shift away from all-or-nothing migrations and toward modular, value-driven adoption is likely to ripple across analytics, EHR, and workflow automation vendors. Margin focus and disciplined capital allocation are becoming table stakes as growth slows and clients demand more for less.