Waystar Holding Corp. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Waystar Third Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sandy Draper, Head of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. It is my pleasure to welcome you to Waystar Holding Corporation's Third Quarter 2024 Earnings Call. Today's call is being webcast and a replay, along with the transcript will be available on our website, along with other related materials following the conclusion of this call. Matt Hawkins, Waystar's Chief Executive Officer; and Steve Oreskovich, Waystar's Chief Financial Officer, are joining me today. After their remarks, we will open the call to your questions. Earlier today, we issued a press release announcing our financial results and a presentation slide deck to accompany our prepared remarks. The materials are available on the Investor Relations section of our website at investors.waystar.com. Before we get started, I will remind you that this call contains forward-looking statements which include all statements that are not historical facts. Examples of these statements include expectations of future financial results, growth and margins. These statements do not guarantee future performance and involve a number of risks and uncertainties, and undue reliance should not be placed on these forward-looking statements. Actual results may differ materially from those expressed in these statements. For a full discussion of the risks and other factors that may impact these forward-looking statements and our business generally, please refer to this evening's press release and our prospectus filed with the SEC on June 7, 2024, and in other reports we file with the SEC, all of which are available on the Investor Relations page of our website. Any forward-looking statements provided during this call are made only as of the date of this call, and we undertake no obligation to update or revise such statements except as required by law. During today's call, we will also discuss certain non-GAAP financial measures, which we believe may be useful in evaluating our financial performance. We have provided reconciliations of adjusted EBITDA and non-GAAP net income and earnings per share and certain other non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with the explanations of these measures in the appendix of the presentation slide deck and our earnings release. These non-GAAP measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Lastly, we are pleased to note our participation in the Evercore ISI Health CONx Conference in Miami and the Barclays Technology Conference in San Francisco, both in December where we look forward to engaging with many of you. With that, I'll turn it over to Matt.

Thank you, Sandy, and good afternoon, everyone. Thank you for joining our Q3 2024 earnings call. Today, I'll cover four key topics that highlight our progress and future direction. First, we'll discuss Waystar's compounding and sustainable revenue growth. Second, I'll share our improvements driving operational profitability and efficiency across the business. Third, I'll highlight the latest innovations in our software platform that deliver value to our clients. And fourth, we'll review recent successes in our client and team member experiences. Then I'll turn the call over to our CFO, Steve, who will provide a detailed view of our financial materials and annual guidance for 2024. First, sustainable revenue growth. In Q3, Waystar delivered another quarter of strong top line growth. Our revenue reached $240 million, representing a 22% year-over-year increase and an acceleration from the 20% growth in Q2 '24. We drove this growth through solid client retention, effective cross-selling, new client acquisitions and modest price increases that demonstrate our software's value. Our sustainable growth strategy prioritizes building enduring client relationships. By delivering a tangible return on investment and lowering the total cost of ownership, we drive client retention and ongoing product expansion. This approach is a fundamental part of our proven strategy as evidenced by two key metrics that track our performance and reinforce our durable growth model. First, net revenue retention came in at 109% in Q3. This result is consistent with our historical range of 108% to 110% over the last 13 quarters. Second, the number of clients generating more than $100,000 in trailing 12-month revenue grew to 1,173, an increase of 14% year-over-year. Our Q3 growth reflects our success in attracting clients seeking a reliable clearinghouse after the February cyber event that impacted a competitor. As we shared in our previous earnings call, we welcomed more than 30,000 new providers to Waystar, rapidly implementing them to ensure they quickly resumed cash flow. Many of these providers have signed standard Waystar business agreements with 2- to 3-year terms and are already expanding their use of the Waystar platform beyond clearinghouse capabilities. Our sustainable growth strategy prioritizes cybersecurity. Waystar demonstrates its commitment to system resiliency by investing in advanced cybersecurity measures that protect our clients' information through proactive monitoring and rapid restoration, ensuring operational continuity. Waystar's software is essential to providers' business operations and cash flow generation. Waystar advocates for system resiliency through nonexclusive connections that deploy modern technical protocols to enable providers to exchange information securely and efficiently with payers. We believe that exclusive relationships between some payers and clearinghouses may contribute to a lack of system resiliency. So far in 2024, Waystar has established dozens of new direct connections to payers, enhancing our extensive network of payer connections. Many of these were previously exclusive with a competitor's clearinghouse. These direct connections are nonexclusive and increase the speed of payment and improve network resiliency. Our focus is to create an efficient exchange of information, allowing providers to prioritize patient care. Moving to profitability and efficiency. This quarter continues the trend of strong EBITDA performance. Adjusted EBITDA reached $97 million, reflecting a 19% year-over-year increase and a 40% adjusted EBITDA margin, including a full quarter of public company expenses. This performance highlights the value of our software platform and our commitment to vigilant cost management while we continue to make strategic long-term investments that position Waystar for future growth. Our Q3 performance also highlights our business model's strong cash flow conversion. We experienced a step-up year-over-year and quarter-over-quarter in unlevered free cash flow, which increased to $89 million in Q3. The improvement underscores our operational efficiency and focus on cash collections. Due to the growth in EBITDA and additional debt pay down, we successfully lowered our net leverage ratio to 3x, compared to the 3.7x at the end of Q2 2024. Waystar's cash flow profile continues to provide us the flexibility to evaluate internal investments, explore M&A opportunities and reduce debt. We remain committed to leveraging our strong position to drive sustainable growth and maximize value for our investors. Next, I'll speak to platform innovation. The inefficiencies in health care are unsustainable. 63% of revenue cycle leaders indicate that their teams are understaffed, highlighting a pressing need for mission-critical solutions that promote automation and the reduction of manual work. Recent market research conducted by Modern Healthcare in collaboration with Waystar underscores the industry's strong appetite for artificial intelligence, revealing substantial returns on investments for early adopters and forecasting a significant surge in generative AI solutions over the next 12 to 18 months. Waystar holds a leading position in this transformative landscape with our purpose-built software adeptly addressing complex industry challenges through intelligent automation and delivering demonstrable ROI. We are uniquely positioned to leverage the power of generative AI through our expansive data network which facilitates over 5 billion transactions, spanning approximately 50% of patients in the United States. With nearly a decade of successful AI deployment and ongoing investments in innovation, we are actively working on more than a dozen generative AI use cases in Waystar's Innovation Lab. At our client conference in September, we demonstrated generative AI software applications in authorization automation, denial prevention and appeal management, which are highly anticipated advancements that we expect to begin launching in 2025. Each use case is thematically designed to help providers achieve additional operational efficiencies, promote more intelligent and accurate interactions with payers and patients and achieve faster time to payment. Our commitment to innovation is not just a promise but a reality. We launched hundreds of new features and enhancements each quarter throughout our cloud-based software platform. In Q3, we introduced automated workflows to identify missing insurance coverage across the patient financial journey, launched self-service tools that enable providers to manage claims and expedite payer payments and expanded patient payment options, including the use of Apple Pay. These innovations empower providers to receive payments faster, more accurately and more efficiently than ever, positively impacting their operations. Our #1 ranking in client satisfaction across all care settings is a testament to our commitment to innovative excellence and positions us as a trusted partner for providers. Lastly, I will speak to client and team successes. At Waystar, we prioritize delighting our clients and fostering enduring relationships built on trust. A recent survey revealed that 97% of all respondents believe that Waystar's best days lie ahead, reflecting their confidence in our software innovations like generative AI and our commitment to a secure modern platform. In September, we hosted our annual client conference, Waystar True North, which attracted a 50% increase in attendance compared to the previous year. This event provided an invaluable opportunity for our client community to connect with industry leaders and peers, exchange best practices and deepen their understanding of our software platform. At the conference, our Waystar Innovation Lab displayed our latest AI and generative AI capabilities alongside advancements in cybersecurity. Clients experienced hands-on demonstrations of our software, further highlighting our dedication to innovation and client engagement. We also convened our Waystar Advisory Board, uniting a nationwide network of health care executives from leading health care organizations renowned for their achievements and expertise. These members shared valuable insights on market challenges and provided guidance on Waystar's initiatives and generative AI product innovations that advance our mission of simplifying health care payments. This quarter, Waystar continued to earn recognition as a leader in innovation and a top workplace. We received several Stevie awards at the 2024 International Business Awards, achieving honors in four categories within the software and health care sectors, including the Gold Stevie Award for Company of the Year in Healthcare and the Gold Stevie Award for Best Payments Solution. Additionally, we celebrated our reputation as an employer of choice, receiving Best Place to Work awards from the Atlanta Business Chronicle and Louisville Business First. For the second consecutive year, Fortune certified Waystar as a great place to work. And this fall, we proudly earned a spot on Fortune's 2024 list of Best Workplaces in Health Care. Together, these accomplishments reinforce our commitment to delivering exceptional value and position us for continued growth in the future. In conclusion, we are pleased to report our achievements in Q3 and maintain a positive outlook for the future as we strategically target a substantial addressable market, we recognize the immense opportunities that lie ahead. Our cloud-based software platform, which features advanced technology like generative AI, combined with our unwavering commitment to exceptional client service, uniquely positions us to achieve sustained durable growth that outpaces the market both now and in the coming years. These advancements not only increase our competitive distinction, but also reinforce our capacity to meet the evolving needs of our clients. Our results affirm our expectation of normalized low double-digit growth as we continue to cultivate a stable enduring growth compounder. With that, Steve will now provide a detailed overview of our financial performance.

As Matt indicated, we had another strong quarter with all financial metrics showing impressive growth, resulting in an increase to our full year guidance. Revenue increased 22% year-over-year in the third quarter to $240 million. This growth was primarily driven by the strength of our software business model and ability to deliver compounding low double-digit growth. This includes continuing to execute our proven plan to drive cross-sell and upsell with existing clients. We successfully expanded the number of clients producing more than $100,000 LTM revenue, to 1,173 as of the end of Q3, adding 56 clients in the quarter and increased our net revenue retention rate to 109%. Additionally, we continue to recognize faster revenue than normal from the clients we've rapidly implemented last quarter, who were impacted by the competitor clearinghouse cyber event. These rapid implementations, along with sustained higher levels of transactions from existing clients, generated $12 million of revenue above our normal business model in Q3, which is an increase from the $9 million that positively impacted Q2 results. Seeing these results for the second quarter in a row validates our prior expectation of a notable and a durable increase to our revenue baseline. Finally, the two small acquisitions in the second half of 2023 continued to modestly benefit the third quarter year-over-year growth rate. While 22% year-over-year growth for Q3, and 20% growth in the first nine months of 2024 are strong, we continue to see normalized low double-digit revenue growth during these periods when accounting for the factors I just noted. GAAP net income for the third quarter of 2024 was $5 million, compared to a net loss of $16 million in the prior year. Q3 2024 includes $16 million of expenses associated with the planned relocation of one of our offices, the vast majority of which is a noncash charge. Adjusted EBITDA of $97 million for the third quarter increased 19% year-over-year. The adjusted EBITDA margin of 40% reflects continued investment in the business items Matt touched on to ensure we meet client expectations and ongoing technology advancements. We continue to steadily improve our capital structure in the quarter, including using net proceeds from the greenshoe exercise, along with $8 million of cash to pay down $111 million of debt. Since the beginning of the year, we reduced our debt by over $1 billion, ending the quarter with $1.1 billion of net debt. On a trailing 12-month basis, our net debt to adjusted EBITDA leverage ratio is 3x, which is down three quarters of a turn in the quarter and already meets the long-term target we previously articulated. Unlevered free cash flow was $89 million in the third quarter of 2024. Operating results and working capital management, along with a single quarterly tax payment in Q3, drove the $40 million sequential quarter-over-quarter improvement. The EBITDA to unlevered free cash flow conversion was 92% in the quarter, well above our 70% long-term target, bringing the year-to-date conversion to 65%. Unlevered free cash flow for the third quarter includes a tax burden of $12 million, as we continue to be a full taxpayer. Our capital allocation priorities remain the same. We expect to continue to delever the balance sheet, targeting approximately one turn a year. We continue to invest in the business to drive sustainable top line growth. And we will also look at opportunities for inorganic growth based on our disciplined acquisition criteria. Looking forward, we are raising our revenue guidance for fiscal 2024 to a range of $926 million to $934 million. At the midpoint, this represents 18% full year growth over 2023 and 12% growth for the fourth quarter. This updated revenue range incorporates the continued performance of the business and the durable uplift benefit of the rapid onboarding of clients as we have described. It also considers the seasonal impact of patient payments processed on our software platform, which are typically higher in the first half of the year compared to the second half. Finally, while we are seeing a nice pickup in sales activities and interactions with existing and prospective clients, buying behaviors and implementation timelines reflect a more normal cadence, which we expect to continue going forward. We are also raising our adjusted EBITDA guidance to a range of $374 million to $378 million, representing 12.5% year-over-year growth at the midpoint, along with an adjusted EBITDA margin of 40% for 2024. Our expectations for adjusted EBITDA incorporate public company expenses, continued investments in software development, cybersecurity initiatives and go-to-market excellence. While it will not be our normal pattern to give future year guidance on our third quarter call, given this year's unique circumstances of revenue growth well above our low double-digit target, we will provide our preliminary thoughts on 2025 revenue. We expect 2025 revenue to approach $1 billion. Compared to the midpoint of our '24 revenue guidance, this represents growth in the high single digits on an as-reported basis. And after adjusting for the unique circumstances in 2024, low double-digit growth on a normalized basis. This initial 2025 outlook is subject to the completion of our 2025 planning process and may change. We plan to give full guidance on our fourth quarter 2024 earnings call. We are now ready to answer your questions.

Our first question will come from the line of Adam Hotchkiss from Goldman Sachs.

Matt, to start, I know we've talked a lot about the sustainable wave of larger customers making clearinghouse decisions post the Change cyber attack. It seems like you saw some incremental benefit this quarter, as you mentioned. Could you just maybe talk about your updated view on how sustainable the elevated demand picture is here? Particularly on the new logo side and after the September conference. And then, Steve, how did you contemplate some of that in your 2025 initial remarks?

Yes. Thanks, Adam. It's good to hear from you. 2024 has been a unique and a very important year for Waystar. We see our business model working successfully. Our teams are high functioning, high-performing. We've seen our pipeline grow throughout the course of the year, and we're very pleased with the progress that we continue to make in the hospital and health system market as well as in the ambulatory side of the market. We did experience the phenomenon in addressing the cyber event that occurred in rapidly onboarding clients to Waystar as we highlighted in our prepared remarks. That was a phenomenal time for us. We were able to showcase how rapidly we can deploy the Waystar software platform. We were able to delight clients and, as we said, many of those signed standard Waystar agreements, two- to three-year in length. They're already beginning to look at other software modules and begin to use additional modules in many cases. We see that trend continuing. One of the things we believe is on hospital decision-makers' minds is that they expect utilization to continue to tick up and they're busy. They are going through a very rigorous process to evaluate their long-term clearinghouse partner. We're getting invited, given our brand reputation and the trust and referenceability we've built, to many prospect and other new client opportunity discussions. We've seen an uptick in the number of RFPs and in the complexity of those RFPs. We're seeing more and more questions asked about cybersecurity, for example, and there tend to be more decision makers at the table. Overall, we would say anticipated demand is robust. People are focused on smart IT spend. We think that Waystar can play a major role with hospitals and health systems as well as the ambulatory clients that we serve, and we look forward to the future.

Yes. Adam, this is Steve. With regards to your question on 2025, I appreciate the desire for information, but ask for your patience for us to finish our planning process to provide any specifics there and what we plan to speak to in the next quarter's call. But what I can provide you directionally, back to the prepared comments, is that we have seen buying behaviors and implementation time ranges reflect a more normal cadence. As I said in the prepared comments, we would expect that to continue going forward without putting a specific timeline on that.

Okay. Really helpful. And then just a quick follow-up on patient payments. Where did Q3 shake out versus your expectations of a normalization in some of the patient payment activity? It felt like things came in a little bit better than expected on the volume base side. But any more color on the financials there would be useful.

Yes. A couple of things. As you're well aware, we tend to see seasonality between the first half and second half as many patients in high deductible plans tend to hit their deductibles in the latter half of the year. That being said, we have seen increased volume and usage of health care services across all of our solutions during 2024, in particular, in the third quarter, slightly above our expectations.

Our next question will come from the line of Stephanie Davis from Barclays.

Congrats on another fantastic quarter. So you mentioned delighting the client with those accelerated onboardings earlier this year. But what learnings did you have from this? And looking forward, are you thinking that the speed to market was unsustainable, or is there something from that accelerated experience you could leverage to improve your forward onboarding efficiency and differentiate yourself?

Thanks, Stephanie. Yes, we had a lot of learnings come out of this period of time that really stand out to us. We were grateful to be in a position to move so quickly and help these providers who had been impacted resume normal business operations; in some cases we were able to deploy Waystar's cloud-based software and get it into use in as little as three days. We're an organization focused on continuous process improvement. With the thousands of providers that we helped during that time, our solution adoption team and product teams have all been focused on the incremental learnings: how to automate enrollments, how to strengthen our project management to ensure we do certain things within that project management work that delight clients. We feel like the momentum created during that time, being able to showcase the speed and adaptability of our organization, carries us forward. We've become even smarter and more focused as an organization because of it. We also see that client referenceability and the fact that we've been able to demonstrate proven partnership, where now we see clients are actually referring their peers, and we're getting some benefit associated with that as we examine our sales pipeline. We highlighted a couple of generative AI solutions; some of those are designed to help us rapidly deploy software too, and help clients evaluate their payer contracts and rules and rapidly get those in place in the Waystar software platform and begin to deploy those.

I guess related to that word-of-mouth momentum you're getting, should we think of this quarter's inflection in large client growth as reflective of existing clients buying more and bringing their peers in to buy more as well? Or is there anything else to call out in the uptick?

Yes. Stephanie, this is Steve. I think there's a mix of a couple of things. One is the expansion of solutions within the existing client base. Transparently, there's also some of those clients that we rapidly onboarded and the time to revenue was faster than we normally see, and that's helped expand the number of clients over $100,000 of LTM revenue in the quarter. It's a healthy mix of both. There's not one that significantly outweighed the other when you look at the total expansion of the number of clients in the quarter.

Our next question comes from the line of Anne Samuel from JPMorgan. One moment for your next question. Our next question comes from the line of Sean Dodge from RBC Capital Markets.

Yes, and congratulations on another great quarter. On the '24 revenue guidance, I'm just trying to better understand the volume-based cadence for the fourth quarter. Your subscription revenue should be pretty stable, I'd imagine probably up a little bit sequentially in Q4. But then if I look at what that implies for volume-based revenue, that means a pretty significant step down on the order of $7 million sequentially to even get to the top end of your guidance for the full year. So I know there's seasonality, Steve, as you mentioned, in volume-based revenue. But directionally, do you think there was that much volume that was pulled forward into Q3? I guess just looking for any more help you can provide kind of squaring all this and how to think about modeling volume-based revenue into Q4?

Certainly, Sean. So you are correct as it pertains to the seasonality and the revenue from patient payments processed on the software platform. We've seen for three quarters now the volumes and the amount of activity being above our expectations. So as we're looking specifically to the fourth quarter, what we're thinking and what we've modeled in from our full year guidance is a volume for the full year getting back to what we would have expected. Now that full year volume and associated dollars are an increase on a year-over-year same-store basis. But we are trying to take a prudent approach for the rest of the year, understanding that the first three quarters so far have continued running above our expectations.

Okay. That's helpful. And then, Matt, your comments earlier on AI and efficiency. You mentioned plans to launch some of those things that you're piloting now beginning, it sounds like, next year. If we think about the savings or the efficiency boost you can potentially drive from those, is there any kind of color you can share just to help us understand how meaningful those could be?

Yes. We will hold on commenting anything specific at this point in time. What I will say is that we believe there's real opportunity in launching the generative AI use cases that we've shown many of our clients. We have some clients participating in co-development work with us and we've seen traction and interest, which is informing how we're thinking about incremental benefit. For example, new software modules and potential revenue associated with them as well as efficiencies that we can help our clients achieve and efficiencies we might achieve internally. That will inform how we think about pricing for new modules and operating efficiencies. One other thought: there was a recent study showing the vast majority of decision-makers are not currently deploying AI or generative AI at scale, yet 90% of the decision makers surveyed want to begin to use AI and generative AI in the near future, and of that 90%, 93% suggested they'd like to work with a scale partner they trust. We feel Waystar is well positioned to capitalize on the momentum and interest here, while being cautious to ensure the solutions we launch will have tangible return on investment consistent with how we offer our other software modules.

Our next question will come from the line of Richard Close from Canaccord Genuity.

Congratulations. Steve, you referenced the $12 million related to new clients from rapid onboarding. I think you also said something about existing contributing to that. That sounds somewhat new to me, and so I was hoping you could explain that a little bit more. And then do you think the $12 million is sort of the peak and we ratchet down from here considering the pipeline commentary you just provided as well?

Thank you, Richard. A couple of things on your first question: yes, the $12 million includes both the new clients we onboarded that were impacted by the competitor's cyber event, as well as existing clients that may have had another portion of their business—whether recently acquired or otherwise—that was also impacted and switched to our software platform to process those transactions through a sister or other organization within the larger company. So it's a mix of both. That same $9 million from last quarter was a mix of both of those two items as well. With respect to the curve or the aperture of the gains above our normal implementation and time-to-revenue, we expect a continued pull-through to a new baseline based on what we've seen these last couple of quarters. Does the number look slightly larger or smaller in the next quarter? I don't have that specific to provide, but we would expect some continuation and pull-through when you look at a normal timeline of implementation, which for a smaller organization might be a month or months, and for a larger, more complex organization with multiple solutions could be anywhere up to 12 to 18 months.

Okay. And then as a follow-up, Matt, I was curious about the conference numbers: up 50% attendance is pretty significant. Are there any metrics historically that you can provide in terms of attendees expanding their relationships with you or anything along those lines?

Thanks, Richard. It's our second year of hosting an in-person conference, Waystar True North. It was fantastic. We don't disclose specific attendee-to-sales conversion numbers publicly, but we love the uptick in participation. We're focused on creating a community of peer-to-peer learning, hands-on training and product feedback. We also host virtual sessions with thousands of participants. We're still fairly early days, but we love the momentum. Seeing hundreds of people talking to each other and getting the benefit of peer-to-peer learning feels like building a community focused on transforming this part of health care, bringing operating efficiency and automation and sharing best practices.

Our next question will come from the line of Elizabeth Anderson from Evercore ISI.

This is Sameer Patel on for Elizabeth Anderson. Congrats on the quarter. I was wondering if you could talk a little bit about the upsell traction you're seeing on these newly onboarded customers related to the disruption. Are you starting to have conversations about adding other modules and additional products like patient pay? Or is that still a bit too early?

Thank you, Sameer. Absolutely. Our growth team is disciplined and high-performing. We organize our teams with dedicated groups for new client acquisition and for cross-selling and upselling, by market—ambulatory-focused and hospital/health system-focused teams. As soon as we onboard a new client, particularly those coming to us from the Change event, we immediately begin conversations about other software modules they could use, including the patient payment module, eligibility automation, insurance coverage detection, prior authorization, claims management, and remit deposit management among others. We have ROI calculators to show the impact of each incremental module, and we layer in client testimonials showing similar profiles who have succeeded. That combination helps drive existing client engagement and cross-sell opportunities, which underlies our belief in embedded growth on our platform.

Got it. That makes sense. And then maybe just if you can put some color around the $12 million contribution from the rapid onboarding of switched or existing customers. Is any of that from upsell? Or is that strictly clearinghouse-related revenues at this point?

The vast majority of that is clearinghouse-related, Sameer.

Our next question will come from the line of Brian Peterson from Raymond James.

This is Johnathan McCary on for Brian here. So we saw an impressive acceleration in NRR this quarter. I just wanted to ask how durable you think that expansion cadence could be going forward? I know you mentioned pricing, but how would you stack rank the products and then the levers of expansion more broadly that drove that metric up this quarter?

Thanks, Jonathan. Our net revenue retention is very consistent. As noted in our prepared remarks, we've delivered 13 quarters of consistent net revenue retention between 108% and 110%. We did notice a little uptick this last quarter, which we're pleased with. It starts for us with gross revenue retention of around 97%. Our growth algorithm is a function of modest price increases given the value we deliver and the cross-sell and upsell work we do. That's the high-level overview of how we think about it.

Jon, it is an LTM-based metric, so it's not specific to any activity in a single quarter. If you think about the prior comment regarding volume-based activity running higher than expectations for the past few quarters, that is another component along with gross and the net revenue retention rate. So that is helpful to what we've seen in the third quarter number.

Okay, very helpful. And then I think you guys have done a great job laying out Waystar versus legacy competitors, and we appreciate you're seeing more complex RFPs. I'm actually hoping to get an update on how you think you're performing versus more modern players also looking to gain share from legacy. Is there anything you can share on win rates or what you're hearing from clients on Waystar versus more modern solutions?

We're one of the modern solutions and we like our positioning. We won't comment on specific competitors, but we are pursuing a large, fragmented addressable market and are replacing homegrown legacy solutions and manual services in many cases. We internally track win rates and decision factors and believe we're trending well. There are scale advantages a player like Waystar can bring, and we're realizing those. Decision-makers are focused on tangible ROI, operating efficiency and increased automation, and they want a trusted partner. We're seeing decision-makers lean toward enterprise-caliber, scaled modern software vendors and platform approaches versus point solutions. We believe our win rates are consistent with what we've reported in prior quarters.

Our next question comes from the line of Liz Lee from Deutsche Bank.

We have been hearing a lot of chatter from both provider organizations about claim denials and payers about claim appeals. Can you talk about whether you're seeing any meaningful trends of either an increase or decrease in claim denial rates and talk about the company's role in helping providers reconcile these denials?

Denied claims are an unfortunate and persistent challenge in the industry. We understand the payer side is trying to prevent fraud, waste and abuse. From the provider perspective, we focus on delivering cloud-based software that accurately submits claims the first time. Our pre-service to mid-service work is focused on delivering accurate claims to payers that can be quickly adjudicated. We track an efficiency measure correlated to lowering denial rates—the first pass claim acceptance rate. Across Waystar's platform, we believe we have market-leading first-pass claim acceptance rates that correlate to lower denial rates when clients begin using the Waystar software platform. Additionally, we offer a denial and appeal management software module to help providers reduce denied claims and to automate the appeal, follow-up and management process when denials occur. One of our generative AI use cases focuses on further automating appeal management and follow-up, helping providers rapidly follow up and recover revenue after services are performed. We think that will have particular interest for clients.

Our next question comes from the line of Ryan Daniels from William Blair.

Congrats on the strong performance. Matt, maybe one for you. You've discussed when highlighting the uptick in RFPs that you're also seeing more parties involved and more complexity in those deals. On the surface, that sounds like it could be a good thing with larger, more platform-oriented deals. But I'm curious if that's extending the sales cycle at all or impacting the close rate or if it's still such an urgent area for investment that you don't see that happening?

Thank you, Ryan. It is becoming more complex, but I don't know that it's extending the sales cycle beyond what we would normally experience. Earlier this year it was very rapid. For hospital and health system organizations, decisions can still take 12 to 18 months and involve committees. We've oriented our approach to bring the right subject matter expertise, tools to discover needs, and we're proactively leading with cybersecurity, modern technology case references and studies. We use ROI calculators and believe we can maintain consistency in the sales cycle. We're continuing to see growth in our sales pipeline and assuming sales cycles return to a more normal fashion and we maintain our win rates, we feel good about our momentum and opportunity.

Okay. Very helpful. And then maybe a broader, bigger picture question. Other than what you've highlighted earlier, were there any key pain points clients mentioned at True North that you think you can meet with the current platform? Or is that impacting R&D or M&A outlook as you go forward?

One of the real advantages of hosting these conferences is hearing directly from clients. We have an exceptional product management and technology team that listens and gathers feedback. Pain points include denial rates and the need to manage increased utilization with the same or fewer resources, which drives demand for automation. We already offer many modules that address these pain points, and feedback informs new product innovation. The interest we saw in generative AI at the conference was because that work is designed to attack these pain points and reduce burdens. We use client input to inform our disciplined M&A approach. We are active in the market and will evaluate technologies that can be added to Waystar's platform through acquisitions to help providers address their pain points.

And our next question will come from the line of Anne Samuel from JPMorgan.

Maybe just on the volume-based revenue, you had kind of tempered expectations on the second quarter call. I was just curious, were you not expecting utilization levels to hold? And where did that upside surprise come in relative to your expectations? And then looking out to Q4 and next year, if utilization were to stay similar to where it is now, would that be upside to your high single-digit target? I think earlier you mentioned your customers were expecting utilization to stay high.

Anne, I appreciate the question. We are continuing to see strong volume-based growth and interactions and continued strong interactions between patients and providers, which utilize our software to generate volume above contractual minimums. Q3 actuals did come in greater than our expectations. Regarding carry-through opportunity, if that demand within the health care system were to continue, that could be above our current expectations for 2025, though I won't speak overly to next year beyond the directional commentary we've provided.

That's really helpful. And then just—you've seen some nice revenue outperformance, which has translated to EBITDA dollar beats as well, but you stayed around that 40% margin threshold. Is there leverage potential in the model from faster growth? How should we think about your philosophy on balancing reinvestment versus margin expansion?

We're pleased with a 40% EBITDA margin, particularly given a full quarter of public company expenses. We're always looking for operating efficiency and have several active projects focused on driving efficiencies across the business. Highlights include reducing patient payment transaction fees and interchange fees, optimizing our payer network to secure more efficient direct connections (which can reduce fees), and increasing digital engagement with patients to digitize interactions and create longer-term efficiency. As we generate incremental cash, we constantly evaluate reinvesting for innovation and go-to-market, using cash to delever further, or pursuing disciplined M&A. We're committed to being vigilant and disciplined in driving operational efficiency.

I'm not showing any further questions at this time. I would now like to turn the call back over to Matt for any closing remarks.

Thank you, Vincent. So just quickly, as we conclude today's call, I want to take a moment to thank our incredible dedicated Waystar team members. Great software companies really take great people and we have incredible people who I'm grateful to work alongside. We have remarkable clients who are our heroes, and we constantly admire the work that they do to care for patients. It just inspires our purpose and mission to do anything we can to help them be more productive so they can prioritize more of their time caring for patients. We're grateful for both our new and existing investors on this public company journey. This is our second public company earnings call, so we're learning our way through this process. We're pleased with our performance and results thus far. We remain focused on executing our game plan. Looking ahead, we're excited about the opportunities that lie before us. We're confident in our ability to execute and deliver strong performance in the quarters ahead. So thank you all for joining us today. We hope you have a great evening.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.