Claritev Corporation (CTEV) Q4 FY2025 Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us, and welcome to the Claritev Corporation Fourth Quarter 2025 Earnings Call. [Operator Instructions] I will now hand the conference over to Todd Friedman, Head of Investor Relations. Todd, please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to Claritev's Fourth Quarter 2025 Earnings Call. Joining me today are Travis Dalton, President and CEO; and Doug Garis, Chief Financial Officer. Jerry Hogge, our Chief Operating Officer, will also join us for the Q&A. During our call, we will refer to the supplemental slide deck that's available on the Investors portion of our website along with the fourth quarter 2025 earnings press release issued earlier this afternoon. Our remarks and responses to questions today may include forward-looking statements. These forward-looking statements represent management's beliefs and expectations only as of the date of this call. Actual results may differ materially from these forward-looking statements due to a number of risks. A summary of these risks [indiscernible] supplemental slide deck and a more complete description in our annual report on Form 10-K and other documents will be filed with the SEC. We will also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Claritev's underlying operating results. An explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found in the earnings press release and in the supplemental slide deck. And with that, I'll turn the call over to Travis.

Thank you, Todd. Good afternoon, everyone, and thank you for your time today. I'm excited to share our Q4 results, '26 guidance and transformation progress. However, first, I would like to reflect for a moment on the state of our journey here at Claritev in the industry. As I near my second anniversary as CEO [indiscernible] helped reflect on what we've accomplished and what lies ahead. When I joined the company, we faced a set of challenges that require a well-thought-out long-term strategic plan. We set out very intentionally to create Vision 2030, not [indiscernible] and are very committed to that. That is not meant to be dismissive of immediate results and short-term objectives. But to be clear, our goal and the focus of this management team is to build a well-run, disciplined health care technology company that deliver sustainable, profitable growth. [indiscernible] real and pressing problems in health care today and the future, specifically with laser focus in the areas of transparency and affordability, which are key to better health outcomes and economics going forward. I'm exceedingly proud of the work we have done to lay a foundation to clarify our purpose, align and recruit talent and focus our company and associates [indiscernible]. That combination of clarity, alignment and focus [indiscernible] our digital transformation and the introduction of [indiscernible] vertical markets has allowed us to turn to profitable growth sooner than expected. Simply put, our strategy is working. Most importantly, [indiscernible] with urgency to help our clients with their most [indiscernible]. One comment on my remarks that we have returned to profitable growth sooner than expected. One year ago, we stood on this call and [indiscernible] guidance of flat to down revenue with significant free cash flow. I'd be remiss to not take a moment and give recognition nearly 3,000 associates at Claritev, who have showed up every day, aligned [indiscernible] making health care affordable for everyone in line with our Vision 2030 plan and delivered these results that have far exceed [indiscernible] we could do entering the year of the turn. On that note, the many foundational reasons why Claritev is positioned to keep winning in this market. We operate in a highly complex and sometimes fragmented and misaligned industry. Our fundamental belief is that increased transparency, better data and technology providers and employers will lead to more alignment and better decision-making. Costs continued to rise, high claims are increasing. The regulatory environment is fluid and [indiscernible] are real challenges to tackle. [indiscernible] our results, we are well positioned to meet these pressing needs, network innovation, claims intelligence, transparency and predictive [indiscernible] that ultimately benefit the health care industry. That combination of solutions [indiscernible] and augment each other when used together is the real strength of our business. I'm often asked about our true competitive advantage. And I'd say it centers around [indiscernible] one, the comprehensive network that we have developed over many decades; two, the deep workflow knowledge and substance of our client relationships as [indiscernible] renewals and sales growth; three, [indiscernible] IP, business ability to analyze this data, flexibility to adapt and technology scale with high provider acceptance. For all the noise around [indiscernible], we achieved greater than 90% [indiscernible] our solutions, actually reducing [indiscernible]; and five, a long history of regulatory expertise that is invaluable to our clients trying to adapt to [indiscernible] and federal environment. Thinking about our competitive advantages, let me take this moment to comment about AI. Technology is massive [indiscernible] improving health. AI is giving us the opportunity to tackle the biggest [indiscernible], fragmentation and sensitivity of data, incentives, complexity of work and access. AI is reshaping the way we develop in our collective future. These persistent challenges are the [indiscernible] the opportunity for us. [indiscernible] across the ecosystem are major, major advantage along with the competitive moat we have created with the [indiscernible]. The competitive advantages I just listed become even more pronounced considered alongside our [indiscernible] strategy, [indiscernible] and losers in this market, and we believe key -- 3 core ingredients are going forward: one, embedded growth domain expertise. [indiscernible], we're going to pause for 1 second. We're getting notes that the audio is bad. So operator, if you can hold [indiscernible], we're going to go to a different line here, okay? [Technical Difficulty]

The audio was bad. Is that a better connection now can you hear us better?

Sounding clear. [Technical Difficulty]

[Audio Gap] complexity of workflows and [indiscernible]. AI [indiscernible] the opportunity for impact and the time is now. Our 4-plus decades of working with clients across the ecosystem are a major advantage of the competitive moat we have created with [indiscernible]. The competitive advantages I just listed become even announced and considered alongside our [indiscernible]. Winners and losers in this bucket, and we believe 3 core ingredients will be crucial going forward. Embedded workflow [indiscernible]; two, client agreements and data rights access and trust. We will work with our clients and [indiscernible] partners where appropriate. We are prioritizing AI where it supports clear outcomes to revenue costs [indiscernible] that can be embedded directly into workflows to find more value from our clients by [indiscernible] and processes, [indiscernible] revenue growth and taking real cost out of [indiscernible]. We have clear examples of success, including the use [indiscernible] advance our surprise [indiscernible], advance our payment and revenue integrity products and workflow automation around credentialing and other key areas. AI must function within claims adjudication, payment workflows, contracting and reconciliation processes that work across payers, providers and employers. [indiscernible] trust. We have 40 years of making and keeping promises [indiscernible]. They trust us to act responsibly to govern well, [indiscernible] of our data and solutions. The moat is no longer code. It is the data, the workflow distribution and trust that will matter the most. Simple tools will go by the wayside, but the long-term winners will be platforms that support rich workflow. Those will be the where AI will enrich what we are capable of delivering. And when you add all of that up, we not only like our position but embrace the AI revolution. We published a strategy briefing coming that lays out our AI position in greater detail, and we will go deeper on this topic at our Investor Day on March 16. Quite simply, [indiscernible] of our competitive advantage and our AI leadership, nobody is better positioned to meet the coming impact on affordability than we are. Turning to the results. We are on the way up as evidenced by our Q4 highlights. [indiscernible] [ 2026 ] guidance. We achieved 6.2% revenue growth in Q4 year-over-year, continuing to demonstrate [indiscernible] durability but that our vertical market strategy is working [indiscernible] road map. Doug will give a fulsome update on the numbers. I'm also really pleased with our bookings of $23 million in revenue record for the company. That result, along with our expected full year bookings growth in 2026 bodes well for our future and creating sustainable growth. Let me give a few quick highlights. As previously reported, we have renewed our top clients and continued to expand our solutions and life space with them in keys like NSA and payment and revenue integrity. We continue to expand our market presence with momentum in the TPA and broker verticals with additional Q4 client acquisition. The same can be said for our provider and government market segments exciting announcements to come on soon. We deployed a number of orders and solutions that reinforce our culture of innovation. Our new solution made possible through our digital transformation as our network builder. The Claritev network of 1.4 million providers is one of the least accretive assets we operate, a key feature for our clients to pass over the whole network or specifically tailored narrow network addressing geographic needs, like [indiscernible] for rural access gaps, while we have been delivering bespoke networks for decades, the network builder, we are now able to create those networks in minutes [indiscernible] to be a lengthy manual process. We will be showcasing this in many others relations during our Investor Day. And we are expanding our footprint internationally in the Middle East, signed 2 additional clients that will create momentum for growth in '26. Overall, in 2025, we are acquired new logos of our vertical markets, our bookings year-over-year. We had more diversification in our selling activity including significant expansion of our payment and revenue integrity solutions of our telemetry into our [indiscernible] than ever before, allowing us to strengthen our win rates and increase our deal size. I expect 2026 to be an even bigger record sales year for [ Claritev ]. [indiscernible] started. We are well into our digital transformation that will create stronger operating and technology platform for the long haul, complemented by our products and [indiscernible]. All this bodes well for Claritev, most importantly for clients and our ability to serve their emerging needs. I'll turn it to Doug.

Doug, if you could wait 1 minute, we're going to change the audio here [indiscernible]. Jason, can you turn your microphone on?

Can you hear us, operator?

Much clearer, yes. Can hear.

Okay. Go ahead, Doug.

Okay. Thank you, Travis, and good afternoon, everyone. I have a lot to cover today, so I'll move quickly through my remarks highlighting Q4 and full year '25. Before I give you the setup for what we believe will be the main catalyst for growth this year. We've also posted a supplemental deck on our Investor Relations website for more detail to support our remarks. To start, 2025 can be understood most clearly in the remarkable pivot in our financial performance that began in Q1 and progressed throughout the year. Revenue, adjusted EBITDA and free cash flow all ended the year well ahead of our initial guide. And our 2026 guidance reinforces our posture as a business on the way up with a growing top and bottom line and an emerging business model built for durable growth over many years to come. So let's get right to the numbers. Total revenue in Q4 was $246.6 million, up 6.2% year-over-year. Growth in Q4 came from both our core businesses and expansion areas. Recall, Q4 is the last quarter with a onetime revenue benefit of about $5 million in our P&C business, which fall into the network service line. In total, we had about $18 million of nonrecurring revenue in 2025, with roughly $2 million of benefit in Q1 and $5 million of benefit in quarters 2, 3 and 4 that will not repeat this year. Adjusted EBITDA was $151.3 million for the quarter, up 7% at a 61.4% margin, and we generated $36.4 million of levered free cash flow in the quarter. We also deployed about $5 million for our small tuck-in acquisition we completed in November. We ended the year with $28 million of total cash and $17 million of unrestricted cash. Our net leverage at the end of the year was 7.7x, an improvement of nearly half a turn from our ending position at the time of our debt refinancing transaction in January. As a reminder, since the debt refinancing transaction concluded in January of last year, we expect Q1 and Q3 to be cash consumption quarters and Q2 to Q4 -- Q2 and Q4 to be cash-generating quarters in the near term. For the full year, revenue was $965.4 million, an increase of 3.7% and adjusted EBITDA was $602.6 million, an increase of 4.5% over 2024. Most notably, levered free cash flow, which we forecasted to be a use of $70 million to start the year finished the year near the midpoint of our most recent guide with a use of $12.3 million. As I frame up our 2026 guide, I want to highlight a few areas that will be relevant to your models going forward. In Q4, we began to see the expected shift of some previously capitalized cost to OpEx, particularly around cloud computing costs, which is normal for technology companies that move from on-prem data center usage to the cloud. This will have a $0 cash flow impact this year as we expect total capital investments to remain consistent. This transition will increase OpEx and thus decrease adjusted EBITDA with a corresponding reduction to related CapEx in 2026 and going forward. I want to be clear that our primary financial objectives this year are driving revenue growth at good margins, combined with a key focus on improving free cash flow. As we move through our digital transformation, additional costs will shift to OpEx and we fully expect to realize meaningful synergies as we outlined in previous calls. At the end of the day, we are focused on total dollars spent, whether expense or capital. So you will hear us focus more on free cash flow and adjusted cash conversion as key metrics to highlight progress against our multiyear strategy. From a go-to-market perspective, Q4 after a remarkable year of sales motion. We exceeded our internal expectations, finishing the year at $60 million, $67 million in ACV booked and having closed more than 650 opportunities. In 2025, we closed more than 100 deals of over $100,000 of ACV up 30%, with the average deal size improving by 50% on a full year basis. The pipeline for 2026 is already strong, and we expect to continue last year's momentum with both existing customer white space and new logo additions. We expect to deliver strong double-digit ACV bookings growth in 2026, which will begin to convert to revenue towards the end of this year and into 2027. These results are rooted in the strength of our core offerings, which were responsible for 94% of our total revenue in 2025. This powerful combination of a durable core alongside the investments we are making to deliver new and improved solutions to expanded end markets gives us visibility and confidence in achieving the strategic and financial objectives we laid out last year with the Vision 2030 plan. Simply put, we're getting more hits with more advance. Now on to revenue guidance. We are initiating 2026 revenue at $980 million to $1 billion, representing 2% to 4% growth over 2025. Excluding the $18 million of onetime revenue in '25, we're modeling 4% to 6% growth this year. While we historically do not provide quarterly splits, given the addition of new ACV and the impact of the onetime revenue, we are providing direction to aid in your quarterly modeling. We would expect low single-digit growth in Q1 with modest sequential growth in Q2 due to the onetime revenue headwind. Then as revenue from new ACV ramps, we expect our growth rate to increase to between 3% to 5% for the second half of the year, adding up to the full year guide. We have included a summary on Slide 15 of the supplemental deck to help bridge the major revenue drivers this year. It provides more color on how you should model gross revenue retention, expansion and ACV conversion to get to our revenue range. We are introducing full year adjusted EBITDA guidance of $605 million to $615 million with margins of 61% to 62%. For a year-over-year comparison, keep in mind the $18 million of onetime revenue in 2025 flow through at 100% margin. When normalizing for that impact, our guidance implies a 3.5% to 5% adjusted EBITDA dollar growth on a like-for-like basis. As discussed earlier, we expect to incur $10 million to $15 million of OpEx costs previously classified as CapEx related to the movement of our technology infrastructure to the cloud. Additionally, we plan to invest $20 million to $25 million in our go-to-market and delivery functions to maintain momentum and best support the double-digit -- the strong double-digit ACV bookings growth we have planned. You'll also notice that we're returning to a dollar-based adjusted EBITDA guide. We believe this better reflects how we're managing the business in 2026, with a clear emphasis on revenue growth, disciplined investment and improving free cash flow. Importantly, should we outperform or prepare to thoughtfully reinvest incremental upside to further strengthen our growth trajectory. We are forecasting total capital of $160 million to $170 million, and we're projecting free cash flow of $0 to $10 million this year. One final point on free cash flow. 2025 included our comprehensive debt refinancing transaction, which distorted some of our metrics. In 2026, we expect to deliver double-digit operating and unlevered free cash flow growth. with adjusted cash conversion normalize into pre 2025 levels at approximately 50% to 55%. I'll add one last thread about the broader macro environment and how that impacts our internal objections. We have recently benefited from a few positive market tailwinds. While there are many market trends we monitor, a few stand out. Out-of-network claims volume, medical inflation and claims mix are the 3 key factors that underpin our modeling and have the greatest impact on our PSAP revenue. In the past 5 years, out-of-network claim volume has remained consistent around 7% of total health care claims. Medical inflation has also remained at historically heightened levels. We have traditionally modeled for more conservative expectations for both volumes and inflation-related growth, which is reflected in our initial guide. And lastly, our mix has continued to favor seen out-of-network and higher-priced services like behavioral health, urgent care and other specialties that can often occur at out-of-network providers from employer-sponsored health plans. I wanted to end by sharing that our capital allocation priorities are clear and unchanged. At the highest level, we continue to focus on organic investments to fuel our Vision 2030 plan. That's where most of our time and energy is directed. These investments are driving innovation, operational improvements and enabling us to get fit for long-term sustained growth. At the same time, we're maintaining a high priority on debt reduction with a renewed focus on value-creating M&A, both of which will strengthen our balance sheet and position us for more flexibility in our capital structure going forward. All of this aligns with our guiding principles to diversify and accelerate, expanding our solutions, verticals and channels to drive growth, while also delevering and derisking our business to enhance cash flow and operating agility. With that, I will turn the call back over to Travis for some final remarks before taking your questions.

Thanks, Doug. Before I turn the call over for questions, let me just make one last comment about moving forward from the year of the turn into the way up. The opportunity ahead is real and exciting in the tools for disruption, we think are here, and that's a good thing. We made the turn successfully because of our focus on our clients and the competitive advantage that I described earlier. But a moats not in [indiscernible] companies will need clear and delineated strategies to deploy value to clients in a rapidly changing environment. We're prepared to do that. Despite the turmoil we read about in health care, I believe in those across the ecosystem that care deeply about access, quality and cost. And the value we bring will continue to live Claritev into new heights. With that, let me turn it over for questions.

Operator, before we go to questions, those on the call, we know there were some audio difficulties at the beginning. Once we are done with the call, we will post the transcript of Travis' comments on our website for you, so you'll have the access to them. So with that, operator, we'll open up for questions.

[Operator Instructions] Our first question comes from the line of Joshua Raskin with Nephron Research.

Josh might be muted. Operator, can we maybe move to the next one. We're not hearing on right now, and we can maybe get them back in queue.

Your next question comes from the line of Louis Mario Gager with Citi.

Operator, if we can pause, I'm getting word that it sounds like the phone lines, you're not getting audio but the webcast is. So if that's true, can you please check that on speakers and see if you're getting audio from them if so, [indiscernible] through?

Yes please hold. [Technical Difficulty] Thank you for your patience while we are experiencing some technical difficulties on today's event. We are currently troubleshooting with our internal team as we speak. I will revert back with an update as soon as possible.

Alexander, thank you. Can you hear us?

Yes, I can.

I think given -- to everyone on the call, I apologize for the technical difficulty because it sounds like the webcast is working, the phone lines are not, so given that rather than hold this, we will cut the call now, and we're glad to call it you ask the call if you have questions, please feel free to send questions to investors#claritev.com or give a call. Thank you very much for your time.