Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Claritif Corporation's second quarter 2026 earnings conference call. you All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, just press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, press star one again. limit to one question and one follow-up also please note that this call is being recorded I'd like to turn the call over to Todd Friedman, head of investment relations. Todd, you may begin.

Thank you, Mark. Good morning, everyone, and welcome to Clarida's second quarter 2026 earnings call. Joining me today are Travis Dalton, President and Chief Executive Officer, and Doug Garris, Chief Financial Officer. During our call, we will refer to the supplemental slide deck that's available in the investors portion of our website, along with the second quarter 2026 earnings press release that we issued earlier this week. Our remarks and responses to questions today will 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 can be found on the second page of the Supplemental Slide Deck in a more complete description in our annual report form 10-K and 10-Q and other documents that we follow the SEC. We also refer to several non-GAAP measures which we believe provide investors with a more complete understanding of Clarida's underlying operating results. An explanation of these non-GAAP measures and the reconciliations to their comparable GAAP measures can be found in the earnings pressure relief and in the supplemental slide deck. And with that, I would now like to thank you.

I'll turn the call over to Travis. Good morning. Thank you for joining us. We're pleased to announce another strong quarter for Clarity and continued progress on our turnaround journey. what your record says you are and our results demonstrate that our strategy is working, our execution is strengthening, growth is returning, and we are building forward momentum across the business. The hard work and discipline over the last two years of laying the foundation of Clarity and Alignment Focus resulted in the term last year, which has positioned us to take advantage of the opportunities in front of us. At our investor day in March, we introduced 2026 as the year of the way up, which is a return to sustainable growth in our multi-year transformation. The first half of the year has demonstrated that our strategy of driving horizontal solutions into vertical markets is working. In addition to focusing on our core client solutions and attacking new markets, we're building leaders and a culture of growth at the company. I'm most proud of the way our people have embraced change and new opportunities to impact healthcare. We also have made thoughtful and smart investments in our technology, platforms, data architecture, and talent over the last two years. Our technology modernization positions us to quickly adapt and harness the power of new tools and technology like AI to bring more value to clients. much faster. The organizations that have the knowledge and align structurally to unleash the potential of AI will be winners going forward. Our greatest asset is the knowledge and industry acumen we possess versus the competition. On today's call, I'll cover our strong second quarter results, the macro healthcare environment that demonstrates the challenges we are so good at tackling for consumers of health care, the continued progress and potential we see in AI. Let me begin with our Q2 performance, which exceeded our expectations on nearly every key metric. For revenue and adjusted EBITDA, both came in above plan. We had another great bookings quarter, exceeding $70 million ACV for the first half of 2026, and well on our way to achieve our $100 million full-year stretch target. important we're still seeing larger deal sizes broader contribution from our entire sales team improving win rates and healthy and growing pipeline. Doug will give some color on the conversion cycle from booking to revenue, but this quarter's business performance validates the foundation against the multi-year financial goals that we outlined at our investor day. I do want to highlight one area that we stressed on our first quarter earnings call, where we have ramped up our focus and brought in new leadership, and that's the third party administrator or TPA business. The TPA vertical represented our largest contributor, second quarter bookings, with several seven-figure deals. Among them was MarPi, which selected our payment and revenue integrity solutions for both prepay and postpay claims. We also expanded adoption of our network and advanced code editing solutions across across the TPA market. Equally important is the breadth of our momentum with wind spanning large national TPAs, regional mid-market organizations, and technology-focused players. Our new segment leader, Dallas Grip, has provided immediate energy to the business, and we expect this segment to contribute roughly 30% of our total new bookings this year, second only to our payer segment. We also see an expanded opportunity in Medicare Advantage. We recently signed a high six-figure ATV deal and new logo in the quarter to build an MA network. While not a significant revenue driver for us today, we believe it represents a meaningful long-term growth opportunity as plans increasingly seek solutions that improve payment accuracy, optimize networks, identify high-cost trends, and enhance provider performance. This is an example of the diversification strategy we set in motion over the past two years, and we're beginning to see it translate into the broader, more durable growth profile. Taken together, our bookings' momentum and revenue growth reinforce our confidence in the long-term strategy. focus on our core solutions and faster innovation with our existing clients, Expand aggressively across new vertical markets with those solutions. create new capabilities for launch that fit the cost reduction and transparency demand of the market. This strategy is starting to yield sustainable growth momentum that will allow us the financial flexibility to invest, drive down our debt leverage over time, improve our financial operating leverage and unlock free cash flow to maximize long-term value. Next, I'd like to highlight several macro trends that continue in healthcare and make our mission of affordability and transparency so important. First, medical cost trends continue to rise, with medical inflation running between 8% and 10% annually. well above overall economic growth. Healthcare spending almost 20% of US GDP, creating significant pressure on employers, the government, and consumers. that exist that help solve that problem, whether it's our network providing access to predictable care, transparency solutions, bringing insights, PRI solutions to happen waste for claims intelligence driving cost savings. we put, we make healthcare more affordable for consumers. Self-funded plan enrollment remains stable and out-of-network claim volumes have remained in the mid-7% range over the last five years. Utilization is stable, but mix is shifting to higher cost areas such as emergency care, behavioral health, and specialty facilities, creating a durable demand environment for our network. integrity and no surprises act solutions. And third, the regulatory complexity persists with NSA IDR changes and reduced federal funding for several programs. These changes and challenges can only be met by nimble, scale, technology-enabled companies like Claritech. Portability and transparency remain central priorities for the federal government, aligning closely with our four capabilities and strategies. Let me highlight the area where government intervention is most measurable. 2022 introduction of the No Surprises Act and the independent dispute resolution process. The recently finalized IDR rules increase the operational compliance requirements for both both payers and providers. As those requirements grow, our scale, technology, and expertise become even more valuable. No company has demonstrated a greater ability to manage NSA claims at scale and clarity. Our arbitration outcomes continue to outperform the industry by approximately 8 percentage points, and we're seeing existing clients consolidate more of their NSA workflow onto our platform. The same dynamics are driving demand across our payment and revenue integrity portfolio. As healthcare organizations face increasing pressure to reduce costs, identify fraud, waste, and abuse, and improve payment accuracy, our solutions become increasingly strategic. We're proud that Everscrute recently recognized Clarity as a leader in payment integrity, and wins like the Marfi engagement underscore a growing momentum we continue to see across this portfolio. Finally, let me turn to AI. We view artificial intelligence as an accelerator of both growth and operating leverage in an area where Clarity has built a meaningful competitive advantage. is only as valuable as the quality of the data behind it, the harness engineering engaged, the workflows it improves, and the trust it serves place in its recommendations. Those are areas where Claritib stands apart. Our multi-year digital transformation positioned us well before AI became today's headline. organized data, modern cloud-based workflow, and deep domain expertise that allows us to deploy AI responsibly and at scale. Today, we're already using AI across numerous models and production use cases to improve efficiency, accelerate decision making, and deliver better outcomes for our clients. We have AI initiatives across all solutions and business functions, but I'll focus today on a few IDR examples where the need and the impact to be seen immediately. If you listen to recent health care earnings calls or read any of the current articles related to NSA, you know that the system is being overwhelmed with volume that drives unnecessary administrative costs and delay. Payers, on behalf of employers, often have only a narrow window to validate claims, identify missing information, and screen out ineligible submissions. Our analysis indicates nearly half all IDR submissions are ineligible, highlighting a significant opportunity to use AI to improve efficiency and accelerate our client's ability to respond quickly. This is where Clarity's combination of skill, data, and AI makes a meaningful difference. Over the past six months, we've launched AI-powered capabilities that automate provider data validation and ineligibility assessments. improving both speed and accuracy. We're also automating case creation for resubmission and enhancing predictive models that optimize pre-arbitration strategy. Together, these types of innovations reduce operating costs, improve outcomes, and resolve disputes earlier in the process, which is good for both parties. Finally, we operate in a highly competitive environment with large and growing challenges facing our clients. The need for more healthcare affordability and transparency has never been greater. Our strategy is delivering results and we have the people, technology, data, and client capitalize on the opportunities to deliver right now and in the future.

Before we do that, let me turn the call over to Doug. Thank you, Travis, and good morning, everyone. In Q2, we outperformed virtually all of our internal financial metrics for revenue, adjusted EBITDA, cash flow, and bookings or ACV. As Travis indicated in his opening remarks, we are executing against the key objectives necessary and we are on track to deliver or exceed the multiyear financial targets we at our March 26th investor day. We are encouraged by our first half results and the momentum we are carrying into the back half of the year. Total revenue in the quarter was $257.5 million, up 6.6% year-over-year. This marks the fifth straight quarter of year-over-year revenue growth and was our highest revenue quarter in 15 quarters back to Q3 of 22. Growth in Q2 came primarily from our largest business, where we saw noted performance in the claims intelligence service line. within our NSA business. Claims intelligence was up close to 14% in Q2, and our total P-SAVE revenue of $220 million was at its highest level in nearly four years. Additionally, our network and payment and revenue integrity service lines performed at or slightly above internal expectations in the court. Network revenues would have been positive year-over-year if you exclude the $5.4 million of one-time revenue from Q2 last year. On a comparable basis, excluding the one-time revenue from last year, our total growth in Q2 is nearly 9%. Q2 adjusted EBITDA was $155.8 million, our strongest performance in 13 quarters on an absolute dollar basis, and represented 60.5% of revenue. Margin was in line with our expectations for the quarter. I'd like to take a moment to note the strength of our cash flow metrics this quarter because they were meaningful. We generated $93 million of operating cash flow up 51% first prior year, 89.5 million of unlevered free cash flow up 24% first prior year, and we generated 54.6 million of levered free cash flow up 24% first prior year. free cash flow up 49% versus prior year. With respect to lever free cash flow, this was our highest quarterly performance in 15 quarters. We also did a great job of managing working capital and proved the pacing of our working capital cash conversion metrics, DPO and DSO by greater than five days. As a reminder, since the debt refinancing transaction concluded in January 25, we expect few Q1 and Q3 to be cash consumption quarters, and Q2 to Q4 to be cash generation quarters in the near to mid-term. Our strong Q2 cash flow performance gives us confidence to invest with the elevated pace of investment required to fund our multi-year transformation and to support our growth initiatives. Our diversification strategy continues to be supported by strong sales momentum, highlighted by another record booking score. Travis provided some stats about strong bookings. With 30 million of ACV booked in Q2, we have already surpassed the 67 million we booked for the full year in 25. We plan on achieving the 100 million bookings aspiration we announced earlier this year. Our first half 26 bookings were up 150% and we exited June with greater than $300 million of active pipeline, up 50% on a comparable basis, with greater than three times coverage. As we have said before, bookings are not linear, but given improvements to our processes and insights into our pipeline, we feel highly confident in our ability to deliver at least 50% ACV bookings growth for the full year. In Q2, bookings reflected a balanced mix of expansion between existing clients and new client acquisition. Cross-sell and up-sell activity accounted for approximately 75% of bookings, while 25% came from five net new client logos, which included several from the provider and public sector verticals. A few additional highlights on Q2 Booking's performance. Pipeline growth remains exceptionally strong alongside continued improvements in lead qualification and sales execution. So far in 26, we closed 16 deals with greater than one million of ACV, up 25% versus last year. Through the first half of the year, our average deal size has grown more than 300% on an absolute dollar basis. Beyond deal size, most of our other key sales metrics continue to trend favorably. Sales cycle times from lead gen to deal close continue to shorten, and our win rates continue to improve. Our momentum is building. Our performance this quarter is reflective of the aggressive sales strategy and realignment to segments we announced at the end of last year. In our supplemental deck, you'll find on our website, you'll see a shift in some of our claims and charges trends. Q2 claims volume grew 11% sequentially and 3% versus prior year, reversing recent trends. There are two primary drivers here that speak about the diversification of our business and why we balance these metrics instead of relying on just one. First, we have now largely lapped the residual impact of a single client issue from several years ago, whose volumes declined increasingly over the last few years. Future quarters starting in Q3 will make for a better comparison to the run rate of our core business as we go forward. Second and more notable, we saw a significant increase in the volume of NSA claims we process, driven by a recent client win. Because NSA claims typically cover a broader set of services, gross NSA claims volume stepped up meaningfully while total charges per claim and revenue per claim moved lower sequentially. This is simply a product mid-shift, not pricing nor margin pressure. Total P-Save revenue dollars grew 8% sequentially and 10% in the quarter versus prior year, and the net dollar contribution is clearly accretive. While we do not give a guide to claims volumes, we note that this mixed dynamic could persist in the second half, which could keep volumes elevated and revenue per claim averages closer to our Q2 exit rate in the near future. Turning to guidance, on the strength of Q2, we are raising our revenue guide two full percentage points to a new range of $1 billion to $1.02 billion, reflecting 4% to 6% growth, and marking a return to greater than $1 billion of annual revenue, which we last eclipsed in 2022. As you review your second half model, I'll note Q2 included a small amount of volume-based revenue that was originally modeled in Q1. Therefore, for the quarterly revenue cadence, we suggest modeling Q3 revenue flat sequentially, largely consistent with current analyst models. We are raising our full-year adjusted EBITDA guide to 610 to 620. million with margins of approximately 61%. As we stated last quarter, we will continue to invest increasingly in sales, marketing, and operations to support the growth in ACV. New bookings take on average two to four quarters to convert to revenue and then another four quarters to achieve fully annualized revenue contribution, which means we will continue to invest now for new and expansion revenue drivers that largely begin contributing to our top and bottom line growth of 27 and 28. We are not changing our guidance for total capital spent at $160 to $170 million in 26. We are raising our free cash flow guide by $5 million to a new range of $5 to $15 million in 26. 26 we expect to deliver substantial operating, unlevered and levered free cash flow growth with adjusted cash conversion normalized into pre-25 levels of greater than 50% by the end of this year. Finally, we remain committed to our capital allocation plan on a multi-year basis. We plan to primarily invest in our business to drive organic growth and drive absolute dollar earnings and free cash flow yield. All of this aligns with our guiding principles to diversify and accelerate, expanding our solutions, verticals, and channels to drive growth. also deleveraging and de-risking our business to enhance cash flow and operating agility. With that, I'll turn the call back over to Travis for some final remarks before taking your questions. Thanks Doug. I've got one quick closing comment and then we'll open the line to questions. Our leadership team is fully formed and it's finding its rhythm. Transforming a 45-year-old business is not a small task, but the momentum and clarity is real and you can feel it every day. Change is a constant and continuous force and we're building the organization to adapt. Our strategy is working. Our alignment internally has allowed us to focus on the our clients, and we're executing with greater speed and discipline as we attack new areas to ensure long-term, sustainable growth. I also want to give a quick shout out to Ryan Fox on his recent victory at the Open Championship. When we relaunched our brand last year, we made a decision to align ourselves with brand ambassadors who do more than wear our logo. They represent the values we aspire to as a company. Brian is not just an amazing golfer, he's a tremendous human being. All of us at ClareTep would not have been prouder to support him and hear him along the way. It was a cool moment to watch him sink that last worry b*** and see the clarity of his name.

With that, I'll turn to the operator for questions. Thanks. We will now begin the question and answer session. If you would like to ask a question at this time, just press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, press star one again. And please limit to one question and one follow-up. Thank you. And your first question comes from the line of Daniel Grosslight with Citi. Daniel, please go ahead.

Hi guys, thanks for taking the question. Congrats on reaching what seems to be a nice inflection point. I know it was a lot of hard work to get here. I wanted to focus on the nice improvement in PSAB volume you saw this quarter. I know you noted it was largely driven by NSA claim growth. I'm wondering How much of that in 2Q, just getting through the system, and how much is more structural? I'm trying to think through the volume dynamic in the back half of this year.

Yes, thank you, Daniel. Thanks for the kudos and happy to take that one. So when you look at our first half volume, we modeled low single digit volume on the whole year. We think there was approximately maybe 45 to 60 million of savings that kind of slipped into Q2, which is a a few million of revenue. We're actually highly encouraged by the volume environment heading into the second half of the year. As the new pronouncements of NSA come about, it's going to be really hard to tell by me taking a little bit more of a modest view of volumes and our base modeling for the second half. Some of the structural changes changes to NSA actually have us very well positioned. But we basically modeled a low single-digit volume decline on the full year. If you look at the sequential progression of volume, we think the Q2 exit rates are a pretty fair baseline for us heading throughout the year.

Got it, okay. As a follow up, more of a math question. If I hold 3Q revenue, relative to 2Q and I plug in kind of the midpoint of guidance for the whole year. That implies a step down from 3Q to 4Q of about seven-ish million dollars. Is that just conservatism in the guide and you really expect to be kind of closer to the high end of revenue guide, the revenue guide, or even above it. I'm just trying to square, you know, why should we see.

a sequential step down in 4Q implied by the guide? Yes, now that's a great question. So what I would say is we're managing between the base and the high end of the range. If you look at the base case, that implies a 2H of about 508 million of total revenue, which year over year is up 3% sequentially is up 1%. So if you kind of take the base of 1.01 on the year, between the base and the high end of the range, you kind of have a sequential step up of 1 to 3%, and then a year-over-year progression of about 3 to 5%. again, largely dependent on claims volume and kind of flow through the P-SAVE business. But we tend to plan the business a little bit more conservatively so we can manage free cash flow. But that's how I would think about your model for Q3 and Q4 exit rate.

Got it. Thank you. Your next question comes from the line of Richard Close with Canaccord Genuity. Richard, please go ahead.

Excuse me. Yes, thanks for the question. Congratulations on the performance here. Doug, I think you mentioned this a little bit in your prepared remarks, but can you just remind us? on new booking wins, like just the time to implement and trigger revenue recognition. Has there been any changes there? Just trying to, uh, you know, plan out when these new wins come online.

Yep. No, that's a great question. Thanks. And thanks for the question. So our average booking, when we have a new booking, it takes anywhere from about two to four quarters to turn into the first dollar of revenue. And then it takes about four quarters for the revenue to annualize. So our ACB bookings metric is not as good as the ACB bookings metric. and different to like a software ARR metric. It operates in principle the same. We had a larger NSA win earlier in the year that took about a quarter and a half to turn on, which is why we had a little bit of overperformance in Q2. But on the round, when you look at our claims intelligence business, and especially our payment revenue intelligence, integrity business, those tend to be closer to two to maybe three quarters. Whereas, for instance, we had a large public sector win with the World Trade Center in the federal space, which takes anywhere from three to four quarters to turn into first dollar of revenue. But two to four quarters is kind of our midpoint of how we plan for business. ACV to revenue conversion. And if you recall in the annual guide that we provided, we had about a 6% to 7% step up in revenue ACV to revenue conversion at the beginning of the year. I think it's fair that we probably are seeing a point higher of revenue conversion this year, which is preempting our beaten race heading into the second half of the year.

Okay, that's helpful. And then just on the digital transformation. You know, maybe an update there. Is it, you know, going as expected? Are you able to accelerate it at all? Just any thoughts in terms of how that's tracking?.

Yes, Richard, this is Travis. Yes, we're, look, I think we, as I said in my opening remarks, we're I think we made a smart decision two years ago to start that transformation program, to start aggressively modernizing the company. The point I would make is that we had investments to make in core systems, we had investments to make in digital transformation, and we had investments to make for growth. And I think the team's done, frankly, a tremendous job of what I call threading the needle, of bringing the company up to modern standards and then investing in our growth thesis. by opening new markets, talent, people. Our digital transformation remains on track. It remains core and central to the company. We've been able to move most of our applications to cloud-based environments. And what was underpinning a lot of the digital work we were doing was really around data architecture and infrastructure. So... I think it's positioned us really well, not just to run the company in its current form, but also to take full advantage of AI models and capability for progressing technologies. So I would say we're very pleased with the progress teams executing, and we're starting to see that. real value from those models that are emerging. Yes, and I would just say AI has been a focal point, obviously, for a lot of organizations. Our digital transformation enables us to be a winner in AI. We have dozens of use cases and models in place. And look, I mean, last quarter, I think we said it, more than half of our code now is generated by AI. And I think the expectation is going forward as we fully modernize our over 400 applications, we'll have approximately the same number of humans doing four to eight times more work. And so we're pretty well positioned in our digital transformation. I always joke around with our chief digital officer. going to go faster, but I think we're well on track to our multi-year transformation in the last update that we gave at Investor Day in March.

Okay, thank you. Your next question comes from the line of Stan Bernstein with Wells Fargo. Stan, please go ahead.

Good morning. Thanks for taking my questions. Maybe first on bookings. Obviously, you know, you've today executed against most of the bulk that you anticipated. There's maybe 26 million remaining. Do you see a path to get to over 100 million here? And how have bookings been converting into revenue versus your expectations at the start of the year?.