Waystar Holding Corp. (WAY) Earnings Call Transcript & Summary

All right. We'll go ahead and kick it off. Thank you for coming to the Canaccord Genuity Growth Conference. I think it's 44 years now. So we appreciate your support. I'm Richard Close. I cover digital health and tech-enabled services. We're excited to have Waystar here. Matt Hawkins, CEO of Waystar. It's their first investor event post the IPO, I believe, the June IPO and then a strong second quarter report out of the gates. Just a little background on Waystar. In 2017, I believe it was November 2 sort of fresh technology companies, Navicure, down in Georgia, near Atlanta; and Zirmed in Louisville, merged and that sort of became Waystar, eventually rebranding as Waystar. And it's really -- I consider it a leading provider of next-generation revenue cycle solutions for both physician practices as well as hospitals and health systems. So Matt, congratulations on the IPO and thanks for joining us and supporting the Canaccord Conference. So for today's time, I really wanted to cover who Waystar is, get a better feel of that -- hit on cybersecurity, obviously, that's a hot button topic; gen AI and then patient payments a little bit because that's a relatively new business for Waystar. And then just pick your brain on in-sourcing versus outsourcing and what's going on there in the health care marketplace. And then we'll hit on the financial model. Hopefully, we'll get to all of that. So...

We'll have some fun.

With that being said, you reported last week, last Wednesday, obviously, a good report out of the gates, as I mentioned. We'll dive deeper into some of this. But just if you gave us the 2 highlights -- 2 or 3 highlights from the second quarter, what investors should take away from the report. And again, we'll get into the meat and potatoes...

Well, first, it's great to be here. It's our first -- as Richard said, it's our very first time that we show up as a public company at an investor conference. So thank you. I've known Richard for a number of years, and I'm grateful for the -- just to know you. So thank you for the chance to visit. We did post -- as an inaugural opening quarter, it's nice to get it under our belts. We posted 20% revenue growth year-over-year and 12% EBITDA growth year-over-year with strong free cash flow. So we're pleased with that. We are a software company, purpose-built for health care. And we very intentionally since the fall of 2017 when we formed Waystar, we've had been on a mission to simplify health care payments. And as you likely know, that's a very involved process as we help providers interact with both insurance companies and increasingly with patients. And we're doing that with modern cloud software. Our financial model is constructed in a way to be very durable, visible. And so Q2 was a testament to that. And I'd also add that it was just a thrill to be able to go through the IPO process and involve our team members across our business and to celebrate them and their many contributions to help us create a special company.

Okay. That's great. So let's dive in a little bit deeper into what you guys do. So maybe describe some of the products. You have a pretty broad portfolio. So if you could just hit on some of the products that you have and then maybe the TAM that you're addressing, and then what differentiates you? There's a lot of revenue cycle vendors. What really differentiates the company. That would be helpful, I think, to better understand.

Perfect. So I'll indicate a couple of things. First, when we formed Waystar, we put, as Richard said, 2 companies together, one called Navicure and one called Zirmed. And that's when I joined. I helped Bain Capital do a little bit of confirmatory diligence at the time on Zirmed. And we were really impressed with the cloud-based architecture of the Zirmed business. And as we looked at the U.S. health care marketplace, we saw what the Wall Street Journal had referred to at the time as the supersizing of American health care, where provider organizations were consolidating, they were buying physician networks and other nonacute and post-acute sites of care to form these integrated delivery networks. And our thesis all the way back in 2017, in forming Waystar was to take this cloud-based platform, a software platform that Zirmed had architected so well and then use that as the chassis, so to speak, to build out an end-to-end software platform that these increasingly complex and sophisticated provider organizations could use to simplify their health care payments. And so like a software company -- a good software company would do, we had a product road map. And we started at one end of this payment complexity. You think about how providers initially work to engage with the patient and understand the patient, whether or not they have insurance eligibility. All the way to the other end, where they're working to collect from provider -- excuse me, from payers, insurance payers as well as from patients. And we just started to build software and then acquire solutions that we could add to and integrate completely with the Waystar software platform. So this is a large addressable market. It's about $15 billion a year and growing about 5% a year. So we're growing into this addressable market opportunity with the software that we have to offer to provider organizations today to help them simplify all of the insurance interactions and then use that insight from the insurance interaction in exchange to also bring clarity to and create a more elegant provider-patient interaction. And we like what we're building, and providers tell us that. And so it's a large market opportunity for us, and we're very focused on building momentum in the space.

So I think my knowledge in interacting with Navicure and Zirmed dates back to -- or 2009 or so. And back then, they had new technology, right, and was gaining share, taking market share, I guess, back then. One of the things going through the IPO process and talking with investors, that is not like really fully understood, I think, and we've seen some examples of it that we'll get into later. But like the tech -- there's pretty decent technology adoption for the most part in revenue cycle, a lot of point solutions and whatnot. But there's a lot of old technology. Can you just talk a little bit about like what Waystar has? And then maybe what's out there now in the marketplace?

Sure. So Waystar is a modern architected multi-tenant, single database software application. We have a beautiful user interface and experience. It's modern, it's intuitive. There's in-app training and prompts. There's AI running in the background to automate work, to prioritize tasks, to reduce the likelihood of error that occurs in any one of these steps. So there's software that's doing so much work. And what we're finding is that we're able to address this very fragmented marketplace. It's a fact that in the U.S. health care system today, where we spent $4.3 trillion a year, there's -- the American Medical Association estimates that there's over $750 billion of administrative waste. And a lot of that is in pursuit of helping provider organizations get paid. And the reason for that waste is you have old legacy solutions, antiquated on-premise software. You even have homegrown Microsoft Excel based solutions that have been self-developed or even manual work that we're -- we have the opportunity to replace with very modern software. And I think there was incentive and motivation for providers to begin to use software. Some of that was facilitated by meaningful use and by the HITECH Act. And we saw a lot of EHR adoption. I think there's now this effort and there's this realization, I think, as providers are really seeking operating efficiency. How do I do more with less? How do I take care of more patients and have utilization in our system and do it with the same number of resources? And the only way to really do that effectively is with modern software. And that's our -- that's where we start. That's where we come in.

Can you talk a little bit about the efficiency and the value that your customers get because it is cloud-based. And I think you've talked about a certain number of iterations and per quarter, and payers don't necessarily want to pay. So just go into a little bit how you help the client.

Thank you. There's multiple ways we're helping the clients. Part of it is, as providers interact with insurance companies, you can appreciate this, that it used to be, years ago, where if a provider was using on-premise software and some of them still are, they were getting -- there's rules and there's things that govern the provider-payer interactions, if that network of interactions isn't kept up to date, if it's not modernized and treated like a normal network should be, then as soon as it's dated, then you create inefficiency. It takes 60 to 90 days for a provider to get fully resolved in their interactions with the payer because payers are changing rules. They're changing what they're going to reimburse. They're changing codes that they'll accept, et cetera. And those -- there's thousands of those occurring every year. And so if a provider organization has to wait for 60 days to get an updated rule, then they're getting claims denied. They're not following up appropriately with patients. And there's this just negative vicious cycle that occurs. It's a fact that in the United States, 17% of all claims are still getting denied. And so we see that and we have -- our approach is to have this cloud-based rules engine where every rule that governs our network is embedded on the platform. So we deliver a first-pass claim acceptance rate, which measures network efficiency, of nearly 99%. And so because of that and because of all the work that our software does, we're statistically reducing the likelihood that a claim gets denied. We're increasing payment. We're delivering -- compressing time to payment. We tell people we get -- help them get paid faster, more fully and more efficiently than ever before. That's one big operating efficiency that we deliver. The other is around labor. You think about how much staff turnover occurs in a provider organization, a large hospital or a group of orthopedic surgeons practicing together. When someone walks out the door, all that institutional knowledge leaves, unless the knowledge is resident somewhere else. And so we put a lot of knowledge in the software itself. And so we're able to deliver another form of efficiency in the form of we're helping these providers' staff use the software effectively. And where it does require work, we're prioritizing tasks for them with the software, and it's very helpful.

That's good that you added that. I didn't have that in my subjects here to cover. I do want to move from this old technology, new technology to cybersecurity. So 2 big events so far this year. First, we had to Change Healthcare, which -- Change is now part of UnitedHealth and then soon after that, Ascension. But it was interesting to hear the United CEO in front of Congress just mentioned like old technology and referring to Change Healthcare. So we could spend a couple of hours talking about cybersecurity, but I'm curious your thoughts in terms of the benefit the company has had, Waystar, from the cyber situations, you definitely called it out on your first conference call. So maybe talk a little bit about the near term, what's happened and what you're expecting here and the rest of the year in '24 and then longer term?

Okay. So when the attack occurred on Change Healthcare on February 21. Obviously, we -- that was a very traumatizing experience for certainly Change, and we wish them health and wellness soon as they work to recover, but also thousands if not millions of providers. And so we were grateful to be in a position where we could help providers very rapidly be able to move from Change to Waystar. We established some guidelines right at the outset. We said, "Look, we want to be very helpful. And -- but we're not going to compromise our business practices to do some temporary work." So we said, we want people to sign a normal Waystar agreement, which tends to be a multiyear auto renewing agreement. So the vast majority of the more than 30,000 providers that we helped move to the Waystar platform that we called out in our earnings material, have signed a standard agreement with us, and we believe those relationships will be enduring. And I've talked about this a number of times, as you know. But really, I see this in phases -- for us, phase 0 was the fact that we already had strong win rates that we've highlighted in our IPO materials, about competing against incumbent competitors. We feel good about how we're lined up there. We like to compete. We respect our competition, but we don't mind competing at all. But when this cyber attack occurred, we see phase 1, where it's just this urgent work, we were able to help thousands of providers. We were able to also do it very rapidly. So we accelerated kind of the natural course of software implementations, and we're able to help large hospitals, smaller organizations, medium-sized organizations move as rapidly as within 3 days to the Waystar software platform. And now as we kind of move past that urgent phase and we enter this longer, call it, multi-quarter, perhaps multiyear phase. There's agitation in the market. People are still kind of -- that have stayed with that clearinghouse from the competitor, they're still kind of limping along in some aspects. And so we hear that and a number of them are going out to RFPs, and we're getting invited to participate in those, which we're grateful for. And I think the next period of time will be characterized as kind of larger organizations thinking through their options. And we hope that Waystar could be a productive option for them.

Okay. That's helpful. So you had mentioned electronic health records and meaningful use. So there was obviously a significant investment in that over the years. And maybe revenue cycle technologies, providers decided not to replace those at that time. So do you think the cyber events is going to accelerate the rip and replace and -- or at least technology evaluation in terms of potential of reducing the risk?

We do see that as an important decision criteria. Obviously, cybersecurity attestation is very important. It's -- we're all impacted by it. So being able to demonstrate cybersecurity is paramount when we're having conversations with decision makers. We do see that we've been able to demonstrate that we've been able to help these providers very rapidly move to the Waystar software platform with minimal to no disruption. And so people have been encouraged by that. And I think there's this awakening that is occurring where people are saying, "Hey, I don't have to stay on this incumbent dated solution, I can move forward." And we're watching that pretty closely, but we see it as opportunity. And we're focused on cybersecurity. We focus on preventative aspects of cybersecurity. All sorts of modern techniques, we attest through HITRUST and SOC 2 and even the NIST 2.0 modern framework, which is an important form of attestation, preventative attestation. And then also rapidly restoring in the event, heaven forbid, that something would occur. I think one of the things that was really detrimental to providers was that the Change clearinghouse stayed down and for many weeks and months, and we think about measuring restoration in hours and like not weeks. And so how do you reduce the cost, heaven forbid, if an event occurred and us having conversations with decision-makers along those lines, we think has been very helpful.

Is that the first question you get when you walk in the door now?

We prepare, proactively, material to highlight that. And if not the first question, I think top of mind to provider decision makers tends to be help me get operating efficiency. Can you attest for cybersecurity? And can you help me get access to the payments I deserve to get paid for? And it's a function of those 3 things. And we also like our platform approach. So the last thing I'd say from a cyber perspective is point solutions, we talk to all sorts of organizations that are using, gosh, more than 5 point solutions just to address the revenue cycle, sometimes far more than that. I was with a CIO in a large state a couple of quarters ago, and she was managing well over 10 instances of point software just for the revenue cycle portion. And so they're wanting more of a platform approach and because it's -- in a way, it's -- at least can point to one organization that can attest for cybersecurity, not having to manage several. And so I think that's becoming an important aspect of this as well.

And then you have 2-way authentication or...

We do. We do multifactor authentication. We do end-to-end point encryption. We do all sorts of stuff internally to containerize access to our platform and then secure it on the other side as well.

Good to hear.

Yes.

So let's move on to AI and you have a relationship with Google Cloud.

We do.

I mean there's other provider companies are -- ones talking about gen AI. So tell us what you guys are doing? How real is it? What's the potential opportunity for Waystar on that front?

Well, we've been long-time deployers of AI on the software platform already. And given that we work with over 1 million providers across all the different care settings, we're processing over 5 billion insurance transactions that represent over $1 trillion of gross claim charges on our platform today. And we think we're naturally positioned to also be able to harness the power of generative AI. As you all know, large language models tend to benefit from large data sets. Our data is all on a single database and has been since we first started processing insurance transactions. So we like what we're doing. We're not taking a pie-in-the-sky approach and come-lately-to-the-party approach. We've been doing this for a while, and we've identified specific use cases in this set of processes that ultimately result in an accurate, efficient and timely payment. And we're just focused on those things and automating those, and then we'll move to the next. And we like the work that we're doing with Google.

Okay. When should we see potential positive impact?

We're -- well, what I'd say is we haven't disclosed that, so I have to be a little careful. You can imagine, we track everything internally. But what I would say is, thematically, we believe that the work we're doing will result in more automation, more prioritization and organization of work, and it's more accurate. Those are -- the early results that we've seen are kind of a 5x improvement in productivity or automation, which is exciting across the different use cases and more accurate than a human can produce. So we like that, and that will be very value-creating when we can talk about specific dates. So we look forward to that.

Okay great. So let's shift to patient payments. It's a painful experience for all of us. I know my practice in Nashville uses [indiscernible] for the scheduling and whatnot. But I think it's Allscripts or something on the back end for payments, and there's this website, and I have to enter all this EIOU, whatnot, patient code and invoice code and it's a pain and you know what?

Yes.

So what are you doing on the patient payment side, the out-of-pocket or the patient responsibility is continuing to grow. It's a problem. It's probably a majority of bad debt for providers. So talk a little bit about what you guys are doing to make our lives easier on patient payments.

Our whole approach is to completely integrate the patient payment capability right with the insurance payment processing. So we're developing tremendous insight based on, again, the $5 billion insurance plus transactions we're processing every year. We know with a high degree of accuracy with the estimated patient payment and financial responsibility is. And interestingly enough, patients want to know. They want to know upfront. It's not -- right now, the scariest thing to a patient is they don't know until 60 or 90 days later. And they've all been conditioned to wait until insurance fully adjudicates before they engage. And provider organizations have not been historically equipped to be collection agencies following up individually with patients. Hawkins, did you pay your bill? Can you pay us now? So what we're seeing is we've had this software, we call it the Waystar patient wallet. We're educating providers on how to fully harness the power of it, and it's really encouraging. We're seeing 30 percentage point lifts in patient payment collection rates. We're seeing 80% rates of self-pay. So patients are self-paying when they're using the software. We're putting the vast majority of patients on a plan, so to speak, using our software when they actually -- we tokenize the credit cards that we put on file, and it just hits the credit card or the HSA card. And so it's delighting them. We see Net Promoter Scores of as high as 60% -- or 60, excuse me. And faster time to payment is the fourth thing I was going to highlight, we're seeing a 40% increase in -- or decrease in time to payment. So it's really exciting, and we think that there's a lot we can do to help make a more modern patient payment experience.

That's helpful. I do want to spend a little time. Your -- I would classify you guys as more an in-sourcer right? Your technology is being used by the health systems, physician practices, but there's outsourcing as well, or one that I cover, I mentioned earlier, going private, but Conifer, the other ones. Can you talk a little bit about the dynamics of like a health system choosing to do it themselves versus outsourcing? And just talk about that.

It's rapidly evolving. So I think historically, there was 2 decisions that a decision maker could make. They could choose to outsource all of it to say, "I don't want to deal with this. I'm just going to outsource it to an R1, a Conifer, an Ensemble or many other BPOs. And -- or they could choose to go the in-source route. And the experience, I think, has varied over the last 20 years. I think we're at a point where we've never had more technological capabilities than we do right now. And we're actually able to showcase the demonstrable return on investment, the sustained return on investment that these organizations can achieve. And so we think the ball game has shifted. We think the ball game is now we have a compelling software platform that provider organizations can choose to in-source and use and get the long-term benefit of. Now the good news is even when they choose to outsource, we're grateful to partner with R1 and Ensemble and Conifer and many others who are using our software or elements of our software platform behind the scenes to do the service work that they've been contracted to perform for the organizations.

And then you've also partnered with some of the electronic health record companies?

We do. Yes. We have over 200 active channel partner relationships, and it's through those channel partner relationships that we're able to serve basically all the different types of providers across the field where you think -- well, they have the practice management or the EHR in these channel partnerships, they're bringing Waystar software in as a natural companion to them. And we grow with them, we help them grow and get access to their client base, and we think that we're delivering an average of 300 feature improvements every quarter on the software platform, innovations every quarter. And so we tell folks that you can future-proof the use of your payment platform by using Waystar because we integrate so effectively to these channel partners, these large EHRs like the Epics and Cerners and MEDITECHs as well. So we like how we're positioned there. We're not trying to be an EHR. We just can be focused on helping those providers process payments...

So in our last minute here to, let's just talk about the financial model a little bit. Just remind us what your targets are maybe for this year and longer term, we know it's a recurring revenue model. So...

I'd like to just emphasize that. It is a recurring revenue model. We're a software company, purpose-built for health care, highly durable, visible revenue. We start every year with the vast majority of our revenue in sight. And we like that. We target low double-digit revenue growth and sustaining that. And we target an adjusted EBITDA margin of about 40%. So we think that's a great place to be. We're developing operating efficiency in our business as we grow top line as we compound growth on our platform and then reinvest some of the efficiencies that we gain back into innovation and growth and things like cybersecurity. And so those are our targets. But we produce strong free cash flow. I think through the proceeds of the IPO, we were able to delever quite a bit. Today, we sit at about 3.4x leverage ratio, and we naturally delever over the course of any given year, about a full turn a year. So that's our financial profile, and we believe that our purpose-built software for health care will be something that can grow and be trusted by provider organizations, strong revenue retention and...

Can you sustain those 40% margins with gen AI investments...

That's our target. On an annual basis, our target is about 40%, and we pick up operating efficiencies as we do more digitization of some of the work that we provide providers. And so some of that gain, we are just reinvesting, and we've operated the business for many years at that 40% range.

Awesome.

Yes.

Well, congratulations. Thank you for coming.

Yes, thank you all, and great to see you. Appreciate it.