Waystar Holding Corp. Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Waystar Second Quarter 2025 Earnings Conference Call. Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Greg McDowell, Investor Relations. Please go ahead.

Thank you, Greg, and good afternoon, everyone. Thank you for joining our second quarter 2025 earnings call. I will begin today by highlighting Waystar's recently announced agreement to acquire Iodine Software, a proven leader in AI-powered clinical intelligence. Iodine is a highly complementary strategic fit, and this transaction is a major step forward in accelerating Waystar's mission to simplify health care payments. We look forward to extending Waystar's leadership in the critical stage of the revenue cycle between care delivery and claim submission, where providers lose billions each year to administrative inefficiencies and expanding Waystar's total addressable market by more than 15%. The purchase price of $1.25 billion represents a high teens enterprise value to adjusted EBITDA multiple based on Iodine's estimated 2025 EBITDA adjusted for synergies. As a clear vote of confidence in Waystar, Advent International, Iodine's largest shareholder, is expected to receive 100% of its consideration in the form of Waystar common stock, subject to an 18-month lockup agreement. Iodine brings a highly recurring subscription-based business model with a financial profile that is aligned with Waystar's. We expect the transaction to be immediately accretive to gross margin and adjusted EBITDA margin following closing and accretive to revenue growth and non-GAAP net income per diluted share in 2027. The acquisition of Iodine also accelerates Waystar's product roadmap by nearly 2 years, unlocking a new level of automation, accuracy, and performance for providers. It advances Waystar's strategic position to eradicate unnecessary denials, maximize reimbursement, and deliver meaningful ROI across the revenue cycle. Following the anticipated close by year-end, we will activate Waystar's proven M&A playbook. Our combined go-to-market team will capitalize on bidirectional cross-sell opportunities, expanding Waystar's reach into Iodine's client base, introducing Iodine's platform to Waystar clients and unlocking greater value where we already intersect. Across the 9 acquisitions Waystar has completed, we have demonstrated our ability to ensure seamless integration and capture identified synergies to drive growth, operational excellence, and financial performance. For more on this important milestone, we encourage you to review the materials published last week available on our Investor Relations website. We will dedicate the remainder of today's call to reviewing Waystar's Q2 results. We delivered our fifth consecutive quarter as a public company of double-digit revenue growth and strong margins in Q2. Revenue reached $271 million, representing 15% year-over-year growth with an adjusted EBITDA margin of 42%. Our momentum in the first half of 2025 has enabled us to raise full-year guidance for both revenue and adjusted EBITDA, which Steve will cover in more detail shortly. As providers navigate margin pressure, workforce shortages, and legislative changes, Waystar's AI-powered software platform is in strong demand. Decision-makers prioritize our mission-critical platform because we help their organizations get paid fully and accurately while reducing complexity and administrative burden. Waystar is uniquely positioned to address evolving industry needs, deliver meaningful ROI, and create long-term value for shareholders. In a dynamic market and evolving policy landscape, two recent developments are worth noting. First, the One Big Beautiful Bill Act; and second, the prior authorization pledge led by America's Health Insurance Plans. The One Big Beautiful Bill Act introduces changes to Medicaid funding over the next decade and imposes stricter eligibility criteria for both Medicaid and Affordable Care Act exchange coverage. Importantly, we believe Waystar is well insulated from downside risk across a range of scenarios. In a hypothetical analysis in which 15% of Medicaid funding were to be affected, Waystar's trailing 12-month revenue would be impacted by less than 1%. More importantly, these conditions highlight the advantage of Waystar's purpose-built platform, which is already equipped to support providers across all payer types. Whether volumes shift across Medicaid, Medicare, commercial, or self-pay, Waystar enables providers to maximize reimbursement, reduce denials, and operate efficiently. As I will describe in a moment, capabilities such as insurance coverage detection, charity screening, patient payments, and unified payment processing are essential for helping providers navigate this evolving funding landscape. Now let's turn to the prior authorization pledge led by America's Health Insurance Plans. More than 60 health insurers recently signed a non-binding commitment with the U.S. Department of Health and Human Services outlining a multi-year path to reduce unnecessary prior authorization requirements by 2026 and implement standardized electronic workflows by 2027. We note that Waystar has long been a market leader in prior authorization automation, well ahead of this anticipated industry pledge. Our software, Authorization Manager connects health care providers to a broad range of payers, while Auth Accelerate launched earlier this year, automates every step of the prior authorization process and enables auto approval. With more than 2 billion prior authorization submissions occurring annually, this remains one of health care's most burdensome and resource-intensive manual processes. Today, Waystar delivers more than 90% touchless authorizations. For a midsized health system, this level of advanced automation can unlock capacity equivalent to over a dozen full-time employees, freeing staff to focus on higher-value work. Waystar is encouraged to see the broader industry coalescing around initiatives that benefit providers and patients. And Waystar will continue to lead from the front, anticipating change and tackling health care's most complex challenges with AI-powered software. As a result, Waystar clients are well equipped to navigate regulatory demands, unlock meaningful ROI, and drive strong financial performance. Waystar has established deep trust with over 1 million providers, reinforcing our conviction that our growth strategy is making a tangible impact. This trust is reflected in our 115% net revenue retention rate and the growing number of clients generating more than $100,000 in trailing 12-month revenue, now at 1,268, which is a 14% increase year-over-year. Our compounding growth algorithm begins with the enduring relationships we create with our clients. Waystar is a proven innovator, delivering software that empowers providers to get paid fully and faster with unprecedented automation and greater accuracy. Each innovation is purpose-built to address health care's most complex challenges. Let me highlight a few now. First, insurance coverage and eligibility. As shifting coverage policies introduce more complexity and increase gaps in insurance eligibility, providers face a rising risk of denied or delayed payments. Waystar's AI-powered software platform delivers unmatched performance in resolving inaccurate or unknown coverage, automatically identifying the correct insurance in as many as 55% of cases that would otherwise result in write-offs. The result, revenue is recovered in seconds with no manual effort required from the provider. For a midsized health system, this can drive upwards of $20 million in incremental annual reimbursement. Second, patient payment optimization. As more financial responsibility shifts to patients, providers face growing pressure to improve affordability, streamline collections, and deliver a positive patient experience. Waystar's AI-powered software platform automatically identifies financial assistance eligibility and pairs it with intuitive digital-first billing and integrated patient payment options. This approach drives up to 80% patient self-service adoption and more than a 20% lift in patient collections, translating to nearly $8 million in annual impact for a midsized health system while significantly reducing the effort required to collect. Importantly, a strong patient payment experience builds trust between the provider and patient at a critical point in the patient journey, reflecting in patient Net Promoter Scores above 60 for health care providers using Waystar's software platform. Third, reimbursement and cash flow. In the first half of 2025, Waystar's AI-powered software platform prevented nearly $6 billion in denied claims. When denials occur, our appeal capabilities accelerate recovery and increase overturn rates, unlocking millions in reimbursement. Clients also reduced days to pay by up to 15%, strengthening cash flow and operational resilience. AI is at the center of Waystar's innovation strategy. Today, the vast majority of revenue is generated from software where AI is actively driving results. We are also generating new incremental revenue with the launch of Waystar AltitudeAI, which deploys generative AI in key use cases on Waystar's platform. Waystar AltitudeAI delivers tangible outcomes such as a 70% boost in appeal productivity and double-digit increases in overturn rates, freeing up capacity equivalent to nearly 10 full-time employees for a midsized health system. Innovations like these are delivering meaningful ROI and strengthening Waystar's leadership in improving provider financial performance. A recent Forrester study of more than 300 provider leaders confirmed that trusted vendors like Waystar are preferred for AI adoption in contrast to new market entrants. Revenue cycle leaders cited scale, integration, and outcomes as top priorities, areas where Waystar has demonstrated clear leadership in all three categories. Waystar's growth strategy is grounded in proven results, impactful innovation, and enduring client trust. As the industry evolves, Waystar is uniquely positioned to lead with a unified AI-powered software platform that delivers automation, accuracy, and meaningful results at scale. We look forward to advancing our software product roadmap and helping providers strengthen financial performance and stay ahead in an increasingly complex environment. Waystar is proud of the continued recognition of its software platform, culture, and the results we deliver to providers and patients. In Q2, Waystar was recognized as the best overall health care payments solution provider by MedTech Breakthrough and named one of the U.S. News Best Companies to Work for. These accolades reflect the unwavering commitment of the Waystar team and our clients to simplify health care payments. Waystar is well governed by a strong, experienced Board of Directors. In Q2, two new independent Board members, Aashima Gupta and Mike Roman joined, bringing valuable expertise and perspective that are already contributing meaningfully to Waystar's long-term strategy. With that, I'll turn it over to Steve to walk through the financial details from the quarter.

Thanks, Matt. Revenue increased 15% year-over-year in the second quarter to $271 million. The basis of Q2 growth continues to be our durable, predictable model that produces low double-digit revenue growth annually on a normalized basis. This includes expanding the client base, producing more than $100,000 of revenue in the last 12 months to 1,268 at quarter end, an increase of 24 clients in the quarter and an increase of 14% year-over-year. It also includes a high net revenue retention rate, which was 115% for the last 12 months and compares to 17% year-over-year growth over the last 12 months. As discussed on our last call, the net revenue retention rate benefits from the rapid time to revenue from clients impacted by competitor cyber events in early 2024 and elevated patient utilization of the health care system over the past year. The other components of the bridge from gross to net revenue retention are consistent with prior quarters. Subscription revenue of $131 million increased 17% year-over-year and 5% sequentially, reflecting strong performance in the business. Volume-based revenue of $138 million increased 14% year-over-year and 6% sequentially. Volume-based revenue benefited from rapid time to revenue from a few large clients that we took live in the quarter. These three implementations highlight our ability to rapidly onboard large clients. Adjusted EBITDA of $113 million for the second quarter increased 20% year-over-year. Our adjusted EBITDA margin was 42%, above our long-term target of approximately 40%. The adjusted EBITDA outperformance was driven by both the revenue upside as well as a slight revenue mix shift to higher-margin provider solutions, which comprise approximately 70% of the total revenue. Additionally, we realized benefits from operational efficiency initiatives, while at the same time, investing in areas such as innovation, cybersecurity, and client experience. Unlevered free cash flow was $111 million in the second quarter of 2025 with an unlevered free cash flow to adjusted EBITDA conversion ratio of 98%. The ratio this quarter benefits from the appropriate delay of federal tax payments to the fourth quarter. The strong first half puts us in a good position to achieve our 70% long-term target for the year. The trend of high cash flow conversion, coupled with expansion of our trailing 12-month adjusted EBITDA generated a 2.2x net debt to adjusted EBITDA leverage ratio at June 30, which is down 0.6x since the beginning of the year. Our continued ability to delever this quarter aligns with our previously stated goal of approximately 1 turn annually. Regarding 2025 full year guidance, please note the following excludes any potential impact from the pending acquisition of Iodine. We are raising revenue guidance for 2025 to a range of $1.30 billion to $1.42 billion with a midpoint of $1.36 billion, which represents an increase of $22 million or 2% versus prior guidance midpoint and represents 10% year-over-year growth. We've included a slide in the IR presentation reconciling the expected 2025 revenue growth rate of 10% at the midpoint of guidance and a normalized revenue growth rate of 12%, which is adjusted for revenue realized in 2024 that would have occurred in 2025 under typical timelines. On previous calls, we've talked about the first half, second half dynamic of our business. As expected, our first half revenue was over 50% of projected full year guidance, primarily based on the shaping of volume-based revenue, including seasonality in the approximate 30% of total revenue generated by patient payment solutions. As a reminder, revenue dollars tend to be higher in the first half of the year compared to the second half as patients with high deductible plans see those deductibles reset annually and typically meet those deductibles in the latter portion of the year. Altogether, we expect total revenue to be down sequentially in Q3 as compared to Q2. And on an absolute dollar basis, we currently expect Q3 and Q4 revenue to be similar. We are also raising adjusted EBITDA guidance to a range of $418 million to $426 million, with a midpoint of $422 million, increasing by $12 million or 3% versus the prior guidance midpoint. We now expect an adjusted EBITDA margin of approximately 41% for 2025, driven in part by the outperformance in the first half of the year. Again, our updated guidance excludes the impact of the pending acquisition of Iodine. As we mentioned on the call last week, on a stand-alone basis, Iodine expects approximately $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, we expect to realize over $15 million of cost synergies within 2 years of closing the acquisition. We prioritize maintaining a strong balance sheet and project net leverage to be approximately 3.5x following the transaction. For clarity, this would only include the expected trailing 12 months of adjusted EBITDA from Waystar stand-alone. As noted earlier, we have demonstrated the ability to delever quickly through strong free cash flow and adjusted EBITDA growth, and we expect to do so post-close.

Operator, please open the call for questions.

This is Destiny on for Alexei. In 1Q '25, you mentioned a $10 million revenue boost coming from client migration post-change IRA tax. Has there been any benefit in 2Q or is that now clearly over? And are we back to additional business decision making?

Yes. Thanks for the question, Destiny. This is Steve. As we had mentioned on our prior earnings call, we had expected that by the time we hit Q2 of 2025, that year-over-year benefit would essentially have lapped such that it doesn't have a significant difference between the as-reported growth rate and the normalized growth rate, and we did see that come to fruition here in the second quarter. So there isn't anything notable to call out, and that's why you didn't see me mention anything in the prepared remarks.

Yes. And Destiny, what I would add, this is Matt. In the original cohort of those that did adopt the Waystar software platform, we've seen excellent retention and continued progress in the cross-sell opportunities there. Not calling it out doesn't mean that we're not seeing tremendous progress. We just choose to be selective given the competitive nature of what we're doing. I will say that it represents a tremendous opportunity for Waystar to continue to execute our play. We do see, just given the level of unrest in that client base, we see continued switching on the horizon. We know one recent survey suggested that more than 36% of respondents are likely to switch clearinghouse vendors, and that some of those change clients that have not switched represented nearly 1/3 of the respondents. We feel like Waystar is a great home, a trusted vendor with strong Net Promoter Scores amongst that cohort that we've already helped and certainly more broadly across our whole client base. But we look forward to being a share gainer during this period of time as we continue to execute our play.

Our next question comes from Adam Hotchkiss with Goldman Sachs.

I just wanted to touch on the rapid onboarding of large clients you mentioned. Is there any reason that some of the volume-based revenue that was brought on from those clients wouldn't be recurring in the second half of the year? I just note that because I think the guidance implies a greater step down in second half revenue than I think we're used to. And so I'm just trying to understand the outperformance in the second quarter and why we wouldn't expect that to flow through to the second half? And I guess, how you think about the upside risk to the second half around those dynamics plus the volume-based side?

Thanks, Adam. Let me speak to our ability to rapidly onboard clients, first of all. As you'll recall, we're a cloud-based software platform, and we can deploy our software very rapidly, especially in moments where, like we saw with the change cohort of impacted clients where they needed it, but also in opportunities where clients make a decision and they just want to move fast. We have a lot of experience, and our software is architected and certainly configurable in ways that make it easy to deploy rapidly. We were thrilled to be able to work with these three clients to rapidly onboard them. And that, as you noted, did impact our second quarter revenue results. Steve, let me turn it to you for thinking through the second part of his question.

Yes. First, just for some context specific to the second quarter, Adam, from a benefit perspective, as it pertains to year-over-year growth rate, if I round up, it's about 2% of that year-over-year growth rate. To your question regarding the recurring nature of that, we would expect it to be highly recurring. As you're well aware, we have a construct with our contracts such that roughly half of the revenue we generate comes through subscription software revenue with the other piece, approximately 50% volume-based. The timing, especially with larger clients, of when the subscription-based aspect kicks in tends to be a little – a few months or several months post-signing of the contract based on the expected rollout. So that revenue is illustrating itself and showing up this quarter in volume-based as a result of the fact that it's outperforming the contractual monthly minimums. We would fully expect as we get further along in the contract lifecycle with those three clients that, that will then show up as subscription revenue at that point in time based upon the fact of where they are contractually versus the expectations. So we expect that to be recurring and in the future revenue stream for quite the foreseeable future. Specific to your question surrounding 2H versus 1H and sort of the expectation of the back half being sub 50% of the total year revenue, that is more a factor of two items. First, the 30% of revenue that comes from patient payments. Please recall, I mentioned in the prepared remarks the impact of patient deductibles and how they tend to impact the first half and second half of the year. And then as it pertains to our approach to expectations from the volume-based revenue stream and patient utilization, we think we're appropriate in our view. But if patient utilization of the health care system continues to remain high as it has for the first couple of quarters of this year, that could lead to the upside of the guidance range we provided. And if we were to see something happen negatively, that would lead to the downside of our full-year guidance expectation in the range. So hopefully, that's helpful context, Adam.

Our next question comes from Allen Lutz with Bank of America.

One for either Matt or Steve, looking at subscription revenue, this was the biggest sequential increase in subscription revenue in the past year. And I guess that would be a little counterintuitive given the benefit that you observed from the cybersecurity piece in 2024. So as we think about the benefit you saw in 2Q, more than $6 million of sequential revenue growth in subscription. What's driving that exactly? And was there any type of impact from tariffs, just concern from customers? And then how do you think about the demand environment in the second half of the year? Is there any contemplation of a pullback? Just what drove the growth in the quarter? And then how to think about 2H from here?

Well, let me speak first about the demand environment, Allen, and then I'll ask Steve to comment on subscription revenue, if that's okay with you. First of all, the demand environment we see as being robust and strong. And I'll tell you why. We see provider decision-makers looking for efficiency. They are adopting technology or wanting to, to help them drive efficiency and collect faster and more accurately. And they want cybersecure solutions, and they want to work with vendors that they can trust. So while our business has no direct exposure to tariffs, as we've talked about in the past, we're serving U.S. clients only. We are noticing that provider decision-makers are thoughtful, diligent, and probably stressed as they prioritize areas of spending. We're really grateful that Waystar is on the favorable side of that prioritization. Because we are a trusted platform, we are mission-critical, and we help providers drive efficient cash flows, and we stand by our results, which are demonstrable return on investment results. When you look at the ways that we think about demand and how it shows up in our business, we have a strong qualified pipeline of opportunities that we look to the second half of '25 and into the future with excitement and a sense of momentum. We also feel good and optimistic about the year-to-date bookings results that we've achieved, so feeling good overall about demand, recognizing that it's stressful, but where provider decision-makers tend to prioritize mission-critical solutions like Waystar. Steve, second part of that question?

Yes. To address your question about subscription revenue and its sequential growth, you are correct. During the last call, I mentioned that we anticipated a tapering off of the subscription growth rate in the second quarter due to the impact of a cyber event on the clients we quickly onboarded. However, what we actually observed was a positive mix of revenue this quarter. I initially noted that this reflects the strong performance in the business, particularly regarding Provider Solutions, which make up 70% of our total revenue. It's important to remember that about 70% of our subscription revenue, which translates to roughly 50% of total revenue, originates from these Provider Solutions. The strength and continued adoption of these solutions during the second quarter have sustained the growth in subscription revenue. This also contributes to the mix shift between Provider Solutions revenue, which has resulted in increased margins and an improved adjusted EBITDA margin for the second quarter. We are very pleased to see this ongoing strength in the business, as it positively affects our overall performance.

Our next question comes from Richard Close with Canaccord Genuity.

Congratulations. Just maybe on the volume growth, again, even with, I guess, the rapid onboarding, adding a couple of percentage points in the second quarter, the quarter was still above the 11% in the first quarter. So I'm just curious, is it your sense it's the higher utilization environment? Or is there any read-through maybe moving more clients to digital payments and getting better collection rates? And I guess I'm just curious where you stand on penetration of patient payments on the digital versus traditional methods and how that's progressing?

Thanks, Richard. Yes, we're thrilled with delivering Q2, and this represents five consecutive quarters of double-digit revenue growth, strong EBITDA margin performance, cash flow conversion, and doing exactly basically what we say we're going to do. So we're thrilled with that. On the volume growth side, we are seeing a strong utilization environment. Obviously, we're prudent in how we think about the business and how we create operating plans and forecasts for the business. But it's been encouraging to see higher utilization, and that tends to benefit the volumetric side of our business, as you know. With respect to the digital payment solutions, the digital-first payment solutions that we offer with the integrated patient financial care solutions that we have. We're not calling that out in particular. We do know that those solutions are driving better collection rates and certainly better patient satisfaction because patients want transparency in what their financial obligation is going to be. We like the activity that we're seeing in the business, but not necessarily calling it out. And I'll pause there. Steve, what would you add to kind of this volume-related question?

Yes. And as we think of the patient utilization of the healthcare system. Recall that roughly half of that volume-based revenue is associated with Provider Solutions, while the other half is associated with the patient payment solution. So to your point about the digitization. We are seeing a good mix in volume from both of those. So if we looked at the second quarter, the year-over-year growth rate, I would say it probably breaks down roughly about 60-40 year-over-year. 60% of that growth is coming through those patient payment solutions, 40% roughly is coming from the provider solution. So a good mix of volume increase across all of the solutions in our business.

Yes. And I'd say from a penetration perspective, Richard, we have a long field right in front of us, right down the middle, where we can just go address and become a market share gainer here with the compelling solutions that we have to offer. So a long way to run.

Our next question comes from George Hill with Deutsche Bank.

I've got two quick ones. One is a layup for Matt and one is a little bit tougher one for Steve. So Matt, if you're listening to MCO earnings calls, they're basically all creating a commercial for Waystar talking and complaining about how the impacts of AI and revenue cycle management tools are killing their cost targets. So I guess what I would ask is, have you seen any downstream impact of that from a client demand perspective? And I guess, is there a way to quantify like on a year-over-year basis, if we think about your revenue, like what is the benefit of kind of increased charge capture or the increased ability to code in the volume-based revenue? And I apologize for this long question. And then for Steve, maybe I missed this in the detailed commentary. But if I look at the subscription revenue and the volume-based revenue, like is the expectation that like either the volume-based revenue – I'm sorry, the subscription-based revenue tracks back meaningfully or the volume-based revenue because if the subscription revenue doesn't, the volume-based revenue would really have to backtrack in order to see Q3 and Q4 down meaningfully to kind of get to the guidance targets. So I would just love kind of more interplay on like which revenue lines are moving in which direction and why as it relates to the guidance, which is looking pretty conservative. Sorry for the long question, guys.

Thanks, George. I'm going to take your first question and lean into it a little bit, if you don't mind, just given the AI opportunity that we see. We were recently ranked #1 in AI platform solutions by Black Book Research. Our clients, as you know, AI is pervasive across the Waystar platform today. The vast majority of our revenue includes software where AI is in use today. So when we're selling and you're seeing revenue growth in our business, you can assume that there's AI embedded in the software solutions that we're delivering. We bring the right AI to the right use case. And in the case of our launching AltitudeAI at the start of the year, where it has several generative AI use cases, one of the things that we're seeing, and we did listen closely to the MCO calls, and we're aware of what's going on in the market. We brought first-to-market capability around denial prevention solutions. I think things that prevent the likelihood that a claim gets denied. We're hearing that in the market a lot, and people want those types of capabilities. Our generative AI solutions are preventing $6 billion of denied claims so far this year. On the other side of that, on the appeal side, solutions to see a 40% increase in appeal overturn rates at three times a faster ability because the generative AI is autonomously gathering financial and clinical information. I'm going to lean in just for a moment further, and then I'll turn it to Steve. But when you think about what Waystar's ultimate goal is, and you start to think and reflect on why Iodine. We think it's a perfect strategic fit. Part of that is really about the use of AI. Waystar has solutions that highly accurately and rapidly and automatically identify patients and do prior authorizations and prevent denials. On the other side, we also have solutions that use AI to process claims at market-leading first pass claim acceptance rates and rapidly appeal denied claims. Why it makes perfect sense for us to go ahead and announce the acquisition of Iodine is because in that middle area between the clinical encounter and the formation of a claim and the submission of that claim, there are more than 60 million denied claims that occur in that area. Our ultimate goal is to create the perfect undeniable claim. You can write that down. Our goal is to create the perfect undeniable claim using AI. We're on a mission to do just that to help providers because we're listening to their commentary, and we know the pain that they're experiencing. We're excited about this. We had the chance to get insight from our clients, and you can bet that as soon as our announcement was over, we scheduled a call with our advisory board. I know Iodine did the same. The client sentiment was 100% positive. I heard direct quotes from our Advisory Board client members who said, 'We're thrilled about this announcement. This will be awesome for us and for healthcare.' Another one said, 'Very exciting acquisition for Waystar feels like the perfect fit for you.' As you may be aware, we recently implemented Iodine across our system. We're looking forward to realizing the full benefit of the opportunities we discovered in our assessment. The Iodine team, much like Waystar's team, has been very invested and engaged throughout the implementation. This other one that's a favorite, 'Now I can say that I'm an early adopter at both Waystar and Iodine. You know I've been a long-time advocate of Waystar, but now I'm not sure that you knew that I was also an early adopter at Iodine. This is all very exciting.' We think about the AI opportunity here to bring modern software, AI that improves the clinical documentation that optimizes the claim and our quest, our ultimate goal to create the perfect undeniable claim that this is a great fit. One other thing I would add is Iodine serves 150-plus clients that constitute or represent more than 1,000 hospitals. In our research, approximately 1/3 of those clients are also Waystar clients. There's this tremendous bidirectional cross-sell opportunity that will emerge from this. This is a perfect AI fit and strategic fit, but it will lead to, we believe, long-term great financial sense as well.

Yes. And I might revert a little bit, George, back to the prepared comments that I stated reminding you about the first half of the year, second half of the year dynamic that happens within and seasonality that happens within the patient payment solutions, primarily associated with patients that are under high deductible health care plans that have those deductibles reset at the beginning of the year and generally start to meet those deductibles in the second half of the year. So that 30% of the revenue tends to be primarily volume-based revenue. What we're looking at from a full-year guide is the expectation that patients start to hit those or meet those deductibles in that second half of the year. So if you're looking at the expectation from a subscription revenue growth rate and volume-based growth rate, it's probably more heavily weighted towards the volume-based growth rate in the second half of the year as it pertains to the full-year guide.

Our next question comes from Elizabeth Anderson with Evercore ISI.

Thanks so much for the question. I don't know if I can get such a sound bite out of you as George can, but I was hoping you could help me understand the math that you were talking about, about the One Big Beautiful Bill math where you're talking about sort of the 15% of Medicaid funding and the HICS funding as well with a 1% impact. Obviously, that's the key question in terms of how people are thinking about a bunch of health care services companies for 2026. So I was wondering if you could just sort of help us flush out like to think about those assumptions. Obviously, there isn't a one-to-one impact with the volume. Maybe you could just walk us through that again as well and make sure we all understand your thinking there.

Certainly. Thank you, Elizabeth. Now, turning to Steve, I want to emphasize that our company, Waystar, serves various payer types through a single platform with solutions designed for efficiency and funding access. Our broad and diverse clientele helps insulate us from reliance on any single funding source. This is particularly relevant for Medicaid. Our resilient business model means we are not heavily dependent on any one factor. In the event of a 15% cut in Medicaid funding, other solutions we offer would see increased demand as providers look for alternative payment methods. We mentioned some of these solutions earlier, including insurance coverage detection, automatic eligibility verification, charity care screening, and propensity to pay AI, all of which are part of our integrated patient financial care suite. Together, these elements position us well against such exposure. We also analyzed the hypothetical scenario of a 15% reduction in Medicaid funding and found it would affect less than 1% of Waystar's revenue over the past year. Although many factors come into play, we are confident in our analysis and the overall resilience of our business.

Yes. I think you said it spot on, Matt. The only thing to add to that, Elizabeth, is the scenario that Matt just articulated is a full downside scenario. So it doesn't include the offsets where we think our clients have moved to in the solutions that we have that could help them that could generate additional revenue for us if that particular client base were impacted as we had articulated.

Our next question comes from Brian Tanquilut with Jefferies.

Maybe just a follow-up on Elizabeth's question. As I think about APTCs, the health insurers exchange subsidies expiring, have you looked into how that would look or what that quantification would be? I know the One Big Beautiful is less than 1%, but PDC will be more relevant in '26. I'm just curious how you're thinking about that.

Yes, we have. We've looked at the analysis in our business, and again, I feel like we're appropriately insulated just given the diversity of clients that we serve and the diversity of patients that they serve. But it's similar thought process there. We've done some sensitivity analysis on our business model. What it speaks to in the affirmative is Waystar's strong business model, and how in-demand our solutions are, the ways that provider organizations are prioritizing Waystar to procure solutions that help them manage this type of difficult environment, and we can help them do that, and our results attest to that.

Our next question comes from Brian Peterson with Raymond James.

My congrats on the quarter. Matt, I wanted to double click on mid-cycle. You're clearly leaning into that opportunity with Iodine. Could you help me understand how penetrated that segment is relative to the other areas of RCM? And as we think about the AI impact on the value to customers, like do you think mid-cycle is maybe the first act relative to other areas? Would love to unpack that a bit?

Yes. Thanks, Brian. Several thoughts here. We do know that mid-cycle is the source where a lot of pain is experienced by providers. You think historically, you can picture this in your mind when you, as the patient, walk into the provider, and they're trying to keep track of that interaction from a clinical perspective. That's historically been very manual labor, manual work. If a provider sees 40, 50 patients a day, trying to keep track of that, we often hear providers talking about going back at the end of their day, trying to retrospectively recall what their encounter was. Sometimes they'll dictate, and sometimes there are other ways to get that information recorded. We do think the mid-cycle, again, that space between the patient provider clinical encounter and on the other side, where a claim is formed and successfully submitted, is ripe with opportunity for AI impact. When we think about how much opportunity is left, we said last week on the call that this represents about a 15% total addressable market expansion for us. That's by the strictest definitions. We believe that there's an opportunity for us to make it much larger as software and AI consume manual work and manual service. We think step one for us in this regard is the acquisition that we announced. We'll work to make this really successful, again, because it's a source of where a lot of pain has been experienced by providers. We like the fact that Iodine has some really compelling solutions that they are market leaders. They have over 160 leading custom AI models that reduce the need for manual work and claim re-review by more than 70%. They're processing 160 million clinical encounters and improving the notes in those encounters every year. They cover approximately 34% of all inpatient discharges. As we think about the opportunity and what we've spoken to is the fact that this clinical data that Iodine generates certainly feeds their AI models today, that's the self-improving thing. As Waystar gets appropriate access to that clinical data set in the future, we believe that it will bolster Waystar's current software with clinical information and make our current software even better and more compelling. Think about the clinical data benefits that we could add to prior authorizations and denial and appeal management automation and the patient financial experience solution. We're really excited about the AI opportunity here. And not just us. We announced this last week. After our announcement, we scheduled a call with our advisory board. The client sentiment was 100% positive. I heard direct quotes from our Advisory Board client members who said, 'We're thrilled about this announcement. This will be awesome for us and for health care.' Another one said, 'Very exciting acquisition for Waystar feels like the perfect fit for you.' Some have been long-time advocates of Waystar while also being early adopters at Iodine. We think about the AI opportunity here to bring modern software, AI that improves clinical documentation that optimizes the claim and our quest, our ultimate goal to create the perfect undeniable claim. That's a great fit. One other thing I would add is Iodine serves 150-plus clients that constitute or represent more than 1,000 hospitals. Our research indicates that approximately 1/3 of those clients are also Waystar clients. There's this tremendous bidirectional cross-sell opportunity that will emerge from this. This is not only a perfect AI fit and strategic fit, but it will lead to long-term great financial sense as well.

Our next question comes from Ryan Daniels with William Blair.

Matt, one for you. You hit on this a little bit in your prepared comments, but earlier this week, we effectively heard from one of your competitors that their technology is falling behind the curve and really impacting market performance. I'm curious if you could dive a little bit deeper about what you're seeing on the competitive front and perhaps any color on recent win rates or how your modern platform is impacting the sales pipeline versus what you've seen in past years against your peers?

Thanks, Ryan. We do see continued switching on the horizon. Our win rates have stayed consistent with what we published as part of the S-1. Strong win rates against all of our direct competitors. We believe this is an opportunity for Waystar to continue to execute on our play. We have noted a level of unrest in the change client base, in particular. We believe that reflecting on our qualified pipeline of opportunities, seeing the number of RFPs and jump balls staying consistently strong and looking at the bookings results that we've achieved so far this year, we're excited about the opportunity that we see and the momentum that we feel is kind of building in the market. We believe that Waystar could be a share gainer here.

Our next question comes from Jailendra Singh with Truist Securities.

Congratulations on a strong quarter. I want to follow up on your comments around health plans pledging to reduce the need for prior authorization. Given your deep partnership with health systems and providers, what is the early feedback on this development? Are providers making any changes in the workflow in response? Is it too early to say? Related to that, we have heard about a concern among providers that this might drive more denials post patient interaction, which could be good for your platform, denial management. Just curious, like any feedback from providers on that?

Thank you, Jailendra. Currently, I don't believe we are seeing more than 2 billion prior authorizations happening today. The authorization process is sometimes essential, serving as a checkpoint for payers on what medical care is provided for complex procedures. Our perspective on the prior authorization pledge is that it highlights the potential for modern technical protocols to improve these interactions. We believe this is positive. Secure modern APIs will enable providers to efficiently receive authorizations from payers. Feedback indicates that both providers and patients struggle with manual authorizations, which can take days and delay care, causing patients to visit the office only to find they cannot proceed with their procedures and must return later. Our prior authorization solutions automate around 90% of these authorizations. We think we are just beginning and have the opportunity to be a market leader in advocating for providers and patients while helping to streamline processes. While it may not decrease the need for prior authorizations, it will certainly simplify the process and create more real-time opportunities. Waystar is positioned to maintain and enhance its leadership in this area.

Our next question comes from Charles Rhyee with TD Cowen.

This is Lucas on for Charles. Congrats on the quarter. Recently, we've heard that the competitor impacted by the cyber attack has been reaching out to customers that have left as a result of the outage, pushing hard for them to return now that their systems are back online, possibly using contractual obligations to do so. I guess, one, are you experiencing this? And then two, you noted earlier, seeing excellent retention amongst these customers from that competitor. But curious if it's possible that you see this as a risk going forward.

We have not noticed that. Again, we've seen excellent retention amongst the cohort that joined us. I won't make a lot of additional comments on what they might be doing in the market. But we believe that as we move further and further away from the actual cyber attack and outage itself, this will be an opportunity for Waystar to help this next cohort of clients that are potentially in a state of unrest to find a great home at Waystar. So I think that's all I'll comment further, given what I've already said, but we would note that there was a survey that suggested there are more than 36% of respondents that are looking or likely to switch vendors. One-third of those respondents are coming from the incumbent competitor that you highlighted. So I'll just leave it at that if that's okay.

Our next question comes from Daniel Grosslight with Citi.

I'd like to go back to the three large client wins that helped boost volume revenue this quarter. Were those wins contemplated in guidance last quarter and so the upside is really coming from onboarding them faster than anticipated? I'm curious if you can provide a bit more detail on those clients, namely are these competitive takeaways? Are they health system or ambulatory clients? And is there opportunity for further cross-sells this year?

Yes, thanks, Daniel. This is Steve. I'll address the first question about our guidance outlook. For our larger clients, we generally expect the time to generate revenue from implementation to take several months, typically between 6 to 12 months, and sometimes even longer based on how they roll it out across their different facilities. In this instance, the three clients mentioned wanted to move quickly, and the solutions they contracted for enabled us to implement them across their entire operations very swiftly. This resulted in exceeding our expectations for the second quarter of 2025. We have incorporated that into our full-year guidance, which explains why we increased revenue guidance by $22 million after beating revenue expectations by $15 million in the second quarter. Also, regarding the mix, it was not exclusively large health systems or ambulatory clients; it included a combination of both.

Yes, they were. In all three cases.

Our next question comes from Steven Valiquette with Mizuho Securities.

It's Steven Valiquette from Mizuho. So obviously, at this point, a lot of key topics have already been talked about. But one thing I was kind of curious about, really in the clearinghouse solutions market and really most of the back end of revenue cycle continuum. Some of your biggest competitors are obviously still owned by managed care payers. One has been talked about a lot on this call, but there are other ones, too. I guess, really with the results you're seeing and some of the wins you've had. Curious if you're getting more feedback that, in this environment, the Waystar independence is really resonating just as strong, if not even stronger in 2025 versus 2024. I know it's hard to quantify something like that, but any qualitative color. Somebody mentioned that a competitor talked about kind of falling behind from a technology innovation standpoint, but really just on the independence part in particular, just curious to hear more about that and whether that's resonating really against a lot of your other competitors that are owned by payers.

Thank you, Steven. We occasionally receive that feedback. Providers are seeking fairness, and there is a concern that a claims management system or clearinghouse owned by a potential payer could create a conflict. We acknowledge that. Providers and patients need a referee to ensure fairness. Waystar aims to provide that through transparency, accuracy, and efficiency. Our advanced technology utilizes AI to foster fairness in this process, and I believe this message will be even more impactful in 2025. As a public company, it has been vital for us to communicate our commitment to fairness in the market and to raise awareness that Waystar is here to assist providers and, in turn, patients. So, to directly answer your question, Steven, we definitely recognize this. The positive news is that we are continually delivering technology. As you know, we roll out numerous feature enhancements and new capabilities every quarter. Providers are relying on us to help ensure their payment processes are future-proof, efficient, and fair. This message is resonating well.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Matt Hawkins, CEO for any closing remarks.

Okay. Great. Thank you so much for joining today, everybody. We definitely appreciate the thoughtful questions and the engagement. Waystar enters the second half of 2025 with a sense of momentum and a sharp focus on execution, and we've updated our 2025 full year guidance kind of as a signal of that. We continue to deliver durable growth, impactful innovations, and meaningful ROI that drives tangible value. With an AI-powered software platform accelerating automation and a growing base of engaged clients, we believe we're well positioned to shape the future of health care payments and to define what's possible, which as you've heard me say, the creation and delivery of the perfect undeniable claim. Our vision reflects our commitment to eliminating friction, maximizing reimbursement, and delivering compounding long-term growth and innovation that leads to value. I'd like to especially thank our heroic clients, our amazing team members, and our shareholders for your continued trust and partnership. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.