Waystar Holding Corp. (WAY) Q2 2025 Earnings Call Transcript

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Overview

Waystar's earnings call reflects strong financial performance with 14% revenue growth and increased EBITDA. The raised 2025 revenue guidance and strong client retention are positive indicators. The Q&A highlights robust demand, recurring revenue, and successful AI integration, enhancing operational efficiency. Despite some management evasiveness, the large client wins and strategic AI acquisitions boost sentiment. No significant negative trends or risks were identified, suggesting a positive stock price movement in the short term.

Key Financial Performance

Revenue Revenue reached $271 million, representing 15% year-over-year growth. The growth is attributed to a durable, predictable model, expanding client base, and high net revenue retention rate of 115%.

Adjusted EBITDA Adjusted EBITDA was $113 million, a 20% year-over-year increase. The adjusted EBITDA margin was 42%, driven by revenue upside, a mix shift to higher-margin provider solutions, and operational efficiency initiatives.

Subscription Revenue Subscription revenue was $131 million, a 17% year-over-year increase. This reflects strong performance in the business.

Volume-based Revenue Volume-based revenue was $138 million, a 14% year-over-year increase. This was driven by rapid time to revenue from a few large clients.

Unlevered Free Cash Flow Unlevered free cash flow was $111 million, with a conversion ratio of 98%. This ratio benefited from the delay of federal tax payments to the fourth quarter.

Net Debt to Adjusted EBITDA Leverage Ratio The leverage ratio was 2.2x at June 30, down 0.6x since the beginning of the year. This reflects the company's ability to deleverage by approximately 1 turn annually.

Net Revenue Retention Rate The net revenue retention rate was 115%, benefiting from rapid time to revenue from clients impacted by a competitor cyber event in early 2024 and elevated patient utilization of the healthcare system.

Clients Generating Over $100,000 Revenue The number of clients generating more than $100,000 in trailing 12-month revenue increased to 1,268, a 14% year-over-year increase.

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Operating Highlights

Acquisition of Iodine Software: Waystar announced the acquisition of Iodine Software, an AI-powered clinical intelligence leader, for $1.25 billion. This acquisition accelerates Waystar's product roadmap by nearly 2 years, enhances automation, accuracy, and performance, and expands the total addressable market by over 15%. The transaction is expected to be accretive to gross margin, adjusted EBITDA margin, and revenue growth by 2027.

AI-powered Innovations: Waystar introduced AltitudeAI, a generative AI tool that boosts appeal productivity by 70% and increases overturn rates. The platform also prevents nearly $6 billion in denied claims and reduces days to pay by up to 15%.

Market Expansion through Iodine Acquisition: The acquisition of Iodine Software expands Waystar's reach into Iodine's client base and introduces Iodine's platform to Waystar's clients, unlocking bidirectional cross-sell opportunities.

Regulatory Adaptation: Waystar is well-positioned to address changes from the One Big Beautiful Bill Act and the prior authorization pledge, leveraging its AI-powered platform to support providers across payer types and automate prior authorization processes.

Revenue Growth: Waystar achieved $271 million in Q2 revenue, a 15% year-over-year increase, with an adjusted EBITDA margin of 42%. Full-year revenue guidance was raised to $1.36 billion.

Operational Efficiencies: Operational efficiency initiatives contributed to a 20% year-over-year increase in adjusted EBITDA, reaching $113 million in Q2. The company also achieved a 98% unlevered free cash flow to adjusted EBITDA conversion ratio.

Strategic Shifts in AI Adoption: Waystar's focus on AI-powered solutions positions it as a leader in healthcare payments, with innovations like AltitudeAI and automation tools driving significant ROI for providers.

Board Expansion: Two new independent board members, Aashima Gupta and Mike Roman, joined Waystar, bringing expertise to support the company's long-term strategy.

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Risk or Challenges

Acquisition of Iodine Software: The acquisition involves a significant financial commitment of $1.25 billion, which could strain resources if synergies or revenue growth do not materialize as expected. Additionally, integration risks exist, as the company must ensure seamless operations and achieve the anticipated benefits of the acquisition.

Regulatory Changes: The One Big Beautiful Bill Act introduces stricter Medicaid eligibility criteria and changes to funding, which could impact revenue streams. Although the company claims to be insulated, any significant shifts in payer volumes could pose challenges.

Market Dynamics: Providers are facing margin pressures, workforce shortages, and legislative changes, which could indirectly affect Waystar's operations and demand for its services.

Revenue Seasonality: Revenue is expected to decline sequentially in Q3 compared to Q2 due to seasonality in patient payment solutions, which could impact financial performance in the short term.

Debt and Leverage: Post-acquisition, the company's net leverage is expected to increase to approximately 3.5x, which could limit financial flexibility and increase risk if cash flow or EBITDA growth does not meet expectations.

Cybersecurity and Operational Risks: The company is investing in cybersecurity and operational efficiency, but any lapses could lead to significant disruptions or financial losses.

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Guidance & Outlook

Revenue Guidance for 2025: Waystar has raised its revenue guidance for 2025 to a range of $1.30 billion to $1.42 billion, with a midpoint of $1.36 billion, representing a 10% year-over-year growth.

Adjusted EBITDA Guidance for 2025: Adjusted EBITDA guidance has been raised to a range of $418 million to $426 million, with a midpoint of $422 million, reflecting a 3% increase versus prior guidance midpoint. The adjusted EBITDA margin is expected to be approximately 41% for 2025.

Impact of Iodine Acquisition: The acquisition of Iodine Software is expected to be immediately accretive to gross margin and adjusted EBITDA margin following closing. It is projected to be accretive to revenue growth and non-GAAP net income per diluted share by 2027. Iodine is expected to generate $120 million to $125 million of subscription-based revenue for 2025 at a gross margin of approximately 75% and an adjusted EBITDA margin of approximately 40%. Additionally, over $15 million of cost synergies are expected within two years of closing.

Revenue Seasonality: Revenue is expected to be lower in the second half of 2025 compared to the first half due to seasonality in patient payment solutions. Q3 and Q4 revenue are projected to be similar on an absolute dollar basis, but lower than Q2.

Market Trends and Regulatory Developments: Waystar is well-positioned to address evolving market needs, including the One Big Beautiful Bill Act and the prior authorization pledge. The company anticipates minimal revenue impact from potential Medicaid funding changes and is prepared to support providers across all payer types.

AI and Innovation Strategy: Waystar continues to invest in AI-powered solutions, including the launch of Waystar AltitudeAI, which is expected to drive significant operational efficiencies and ROI for clients. The company is focused on advancing its software product roadmap to address complex healthcare challenges.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:In 1Q '25, you mentioned $10 million revenue boost coming from client migration, post change IRA tax. Has there been any benefit in 2Q or is it now clearly over?

A:The year-over-year benefit has essentially lapped by Q2 2025, and there isn't a significant difference between the as-reported growth rate and the normalized growth rate. The original cohort of clients adopting the Waystar software platform has shown excellent retention and progress in cross-sell opportunities. There is continued switching on the horizon, with a survey indicating over 36% of respondents likely to switch clearinghouse vendors.

Q:Is there any reason that some of the volume-based revenue brought on from rapid onboarding of large clients wouldn't be recurring in the second half of the year?

A:The volume-based revenue is expected to be highly recurring. Contracts are structured such that roughly half of the revenue comes from subscription software and the other half from volume-based revenue. The timing of subscription revenue tends to lag a few months post-contract signing. The second half revenue is expected to be influenced by patient deductibles and patient utilization trends.

Q:What drove the sequential increase in subscription revenue in 2Q, and how do you think about the demand environment in the second half of the year?

A:The sequential increase in subscription revenue was driven by strong performance in provider solutions, which comprise 70% of total revenue. The demand environment is robust, with providers prioritizing efficiency, cybersecurity, and trusted vendors. Waystar has a strong qualified pipeline and year-to-date bookings results, indicating momentum for the second half of the year.

Q:Is the higher utilization environment or better collection rates from digital payments driving volume growth?

A:The higher utilization environment is contributing to volume growth. Digital payment solutions are driving better collection rates and patient satisfaction, but they are not being specifically called out. The year-over-year growth rate in Q2 was roughly 60% from patient payment solutions and 40% from provider solutions.

Q:Have you seen any downstream impact from MCO earnings calls highlighting the benefits of AI and revenue cycle management tools?

A:Waystar's AI solutions are highly integrated into its platform, with AltitudeAI preventing $6 billion in denied claims and improving appeal overturn rates by 40%. The company aims to create the 'perfect undeniable claim' using AI, and the acquisition of Iodine is seen as a strategic fit to enhance AI capabilities in the mid-cycle space.

Q:Can you clarify the interplay between subscription revenue and volume-based revenue in the second half of the year?

A:The second half of the year is expected to see more growth in volume-based revenue due to seasonality in patient payment solutions, which are influenced by patient deductibles resetting at the beginning of the year. Subscription revenue growth is expected to taper off slightly.

Q:What is driving the growth in mid-cycle solutions, and how does AI impact this segment?

A:Mid-cycle solutions address pain points in the clinical encounter to claim formation process. AI is reducing manual work and improving efficiency, with Iodine's solutions reducing claim rereview by over 70%. The acquisition of Iodine expands Waystar's total addressable market by 15% and enhances its AI capabilities.

Q:Are providers making changes in response to health plans' pledge to reduce the need for prior authorization?

A:Providers and patients suffer from manual prior authorization processes. Waystar's solutions automate 90% of authorizations, and the company sees an opportunity to lead in streamlining these processes with modern APIs and AI.

Q:Are you experiencing competitors reaching out to clients that left due to a cyber attack?

A:Waystar has not noticed competitors reaching out to clients that left due to a cyber attack. The company has seen excellent retention among the cohort of clients that joined after the incident.

Q:Were the three large client wins in Q2 contemplated in guidance, and what is their profile?

A:The three large client wins were not fully contemplated in prior guidance as they onboarded faster than expected. They include a mix of health system and ambulatory clients and were competitive takeaways.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing the potential impact of competitors reaching out to clients post-cyber attack and provided limited details on the specific profile of the three large client wins.

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Earnings Word Cloud

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Waystar's earnings call highlights strong financial metrics, including raised revenue and EBITDA guidance, a successful acquisition of Iodine, and positive client feedback. The Q&A session reveals excitement about strategic fits and cross-selling opportunities. While there are some seasonal revenue declines, the overall outlook remains optimistic with robust AI and innovation strategies. The absence of negative management responses further supports a positive sentiment. However, some sequential declines and market uncertainties temper the outlook, resulting in a 'Positive' rating rather than 'Strong positive.'

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