Greetings, and welcome to the CareCloud Third Quarter 2026 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brendan Covello, Corporate Counsel. Thank you. You may begin.
Good morning, everyone. Welcome to CareCloud's Third Quarter 2026 Conference Call. On today's call are Mahmud Haq, our founder and Executive Chairman, Stephen Snyder, our Chief Executive Officer, A. Hadi Chaudhry, our Chief Strategy Officer, and Bonnie Boyer, our Chief Financial Officer. Before we begin, I would like to remind you that certain statements made during this call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than the statements of historical fact made during this call are forward-looking statements, including without limitation, statements regarding our expectations and guidance for future financial and operational performance, expected growth, business outlook, and potential organic growth and acquisition.
Forward-looking statements may sometimes be identified with words such as will, may, expect, plan, anticipate, approximately, upcoming, believe, estimate, or similar terminology, and the negative of those terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. These statements reflect our opinions only as to the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our press release and other reports filed with the Securities and Exchange Commission, where you'll find a more comprehensive discussion of our performance and factors that could cause actual results to differ materially from these forward-looking statements.
For anyone who dialed into the call by telephone, you may want to download our Third Quarter 2026 Earnings Presentation. Please visit our investor relations site, ir.carecloud.com, click on News and Events, then click IR Calendar, click on Third Quarter 2026 Results Conference Call, and download these earnings presentation. Finally, on today's call, we may refer to certain non-GAAP financial measures. Please refer to today's press release announcing our Third Quarter 2026 Results for reconciliation of these non-GAAP performance measures to our GAAP financial results. With that said, I'll now turn the call over to our CEO, Stephen Snyder. Stephen?
Thank you, Brendan, and good morning, everyone. Before I get into the quarter, I am pleased to welcome Bonnie Boyer to her first earnings call as CareCloud's Chief Financial Officer. Bonnie joined us in July and stepped into the CFO role in October. You will hear from her shortly. I also want to take a moment and thank Norm Roth. Norm served as our interim CFO through a pivotal period, including the capital structure transformation I will describe in a few minutes, and he did it with steadiness and integrity, and we thank him for his excellent work. Shifting to our quarterly performance, I am pleased to report that the third quarter was the most profitable quarter in CareCloud's history. We set all-time records for GAAP net income, GAAP earnings per share, and adjusted EBITDA. GAAP net income grew 54% year-over-year. Adjusted EBITDA grew 28% year-over-year.
The $0.10 we earned per share in this quarter matched what we earned in all of 2025. On our last call, I told you we had made a deliberate trade. We gave up some near-term reported earnings to build durable earnings power, and we expected that trade to begin paying off in the second half. This quarter, it did. This morning, I will cover the results that drove the margin expansion, how the cleaner capital structure is now working for common shareholders, the growth engines we are building, and our outlook for the year. Let me start with the numbers. Third quarter revenue was $33.7 million, up 9% from a year ago. For the first nine months of 2026, revenue was $96.9 million, up 13%. GAAP net income was a record $4.7 million, up 54% year-over-year.
That was our 10th consecutive quarter of positive GAAP net income. Net income attributable to common shareholders was $4.2 million, growing nearly two and a half times over the third quarter of 2025. GAAP earnings per share was a record $0.10 compared with $0.04. Adjusted net income was $5.8 million, up from $4.4 million. Likewise, adjusted EBITDA was a record $9.9 million, up 28% year-over-year. Underneath those records, gross margin, which we define as revenue less direct operating costs, expanded to 50.5% from 47.8% a year ago. Every profitability measure expanded this quarter, and that is what we expect from our model. Naturally, our margin expansion did not happen by accident, so let me explain where it came from. Three primary things drove it. The first is AI and automation inside our own operations.
We have embedded AI and automation across our revenue cycle work, automated claim validation before submission, denial prediction, and remittance processing. Over the past three months alone, that has cut manual claim touches by approximately 44%. Our team now handles more volume with the same headcount, and that is beginning to show in direct operating costs. The second is discipline. Total operating expenses decreased by 2.5% while revenue grew nearly 9%. That is operating leverage doing what it is built to do. Bonnie will walk you through the line items shortly. The third is revenue mix. We are deliberately growing our higher-margin technology and compliance offerings and leaning away from lower-margin project-based services. Technology-enabled business solutions grew to $24.3 million this quarter, up from $21.6 million year-over-year. Record earnings are only half of the story. The other half is who those earnings now belong to.
In May, we redeemed all of our Series B Preferred Stock and completed a two-year rebuild of our capital structure. Let's go back for a moment to the summer of 2024. At that time, we had two series of preferred stock outstanding, and together they carried a dividend obligation of roughly $15 million a year, or close to $4 million a quarter. in September 2024, our Series A shareholders approved reducing the rate to 8.75%. Thereafter, we converted approximately 80% of the Series A stock into common stock. Then finally, in May of this year, we retired the Series B entirely. The preferred dividend this quarter was about $540,000. That is an 86% reduction from where we stood two years ago. Roughly $13 million a year that used to go to preferred stockholders is now staying with the common shareholders.
Last quarter, I told you that from the third quarter on, far more of every dollar we would earn would flow directly to the common shareholders. You can now see that directly in the numbers. A year ago, only about half of our net income reached the common shareholders. This quarter, nearly 90% did. We replaced a perpetual preferred with lower-cost debt that we pay down every month. To fund the redemption, we borrowed on both the term loan and the revolver, and we put about $41.6 million of that borrowing to work, retiring the Series B Preferred Stock. Since then, we have been steadily reducing our balance. During the third quarter, we fully repaid the $9 million that we had drawn on the revolver, which is now completely undrawn.
The term loan has come down every month to $36.7 million at the end of September and $34.2 million as of November 2nd. In less than six months, we have reduced the debt we took on to support the redemption by approximately $7.4 million. Our priorities for free cash flow are simple and in this order. First, keep paying down the term debt. Second, make selective cash-funded accretive tuck-in acquisitions like Empower. Every quarter, more of CareCloud's value belongs to our common shareholders. With the balance sheet working for us, let me turn to where the growth comes from next. We are building several growth engines on top of our recurring revenue base, and I want to highlight two of them today. Let me start with enterprise AI development. Last quarter, I told you we were working to expand our relationships with existing enterprise clients.
In August, one of them, KabaFusion, a national home infusion provider and a longstanding CareCloud revenue cycle client, selected us to build LailaCare. LailaCare is an AI-native platform that connects referral intake, authorization, patient engagement, and revenue cycle workflows into one unified system. We recognized our first revenue from that work in the third quarter. Just as important, it proves a model. Sophisticated healthcare organizations, including private equity-backed platforms, are coming to CareCloud not just to run their revenue cycle, but to build the AI-powered systems that run their businesses. We believe that can become a repeatable growth engine alongside our recurring revenue. Bonnie will go deeper on LailaCare in a minute and our AI platform shortly. The other is compliance through Empower, which we acquired in May. Compliance has become a board-level priority for healthcare practices and facilities.
Payer audits are expanding, enforcement is rising, and the AI tools now used for documentation and coding need compliance guardrails. Empower's team recently reversed more than $1 million in alleged payer overpayments for a client. That is the kind of outcome that earns true trust. That trust is already turning into new CareCloud revenue cycle business. Empower relationships have led to RCM signings with a management services organization and a wound care practice. To scale this, on October 21, we appointed Empower's founder, Mitch Brie, as CareCloud's Chief Compliance Officer. He also continues to serve as President of Empower. His mandate is to bring compliance services to our more than 40,000 healthcare providers. Later this quarter, we plan to launch a subscription software-based compliance offering that turns Empower's expertise into scalable recurring revenue. All of that brings me to the outlook.
We are reaffirming our full year 2026 guidance, revenue of $128 million-$132 million, adjusted EBITDA of $29 million-$31 million, and GAAP earnings per share of $0.20-$0.23. Last quarter, I said our guidance implied a meaningfully stronger second half. The third quarter delivered the first half of that. For the fourth quarter, the final building blocks will be the same that I described in August, and now they are in motion. Continued growth in our recurring revenue base, our development work for enterprise clients, and the launch of our compliance offering, and the cross-selling across our base, and the continued benefit of a simpler capital structure. As always, our expectations depend on the signing and continuation of certain client and vendor relationships, the timing and scope of client projects, and our execution of the integration and expense management initiatives that support these objectives.
Before I hand it over to Hadi, let me leave you with where things stand today. Three months ago, I called the second quarter a quarter of building. The third quarter showed what we were building toward. Record net income up 54%. Record earnings per share up 150%. Record adjusted EBITDA up 28%, and expanding margins across the board. We have 10 straight profitable quarters, a balance sheet that gets stronger every month, and virtually all of our net income now going to common shareholders. And we have new growth engines, including enterprise AI development and compliance, sitting on top of more than 40,000 healthcare providers who already trust us. We are not done, but this quarter showed that our model works. With that, I'll turn the call over to Hadi Chaudhry, our Chief Strategy Officer, to walk you through our AI strategy and product progress. Hadi?
Thank you, Steve, and good morning, everyone. Earlier this year, we laid out a simple framework for how we think about AI at CareCloud. Three tracks. First, using AI inside of our own operations to do our work faster and more efficiently. Second, embedding AI into the products our clients already use. And third, building new AI-enabled platforms. This quarter, we made measurable progress on all three. On the first track, our AI Center of Excellence continues to advance our stratusAI products for internal use. stratusAI now answers calls in our own patient call center, and AI-assisted coding is deployed in coding services we provide to our clients. Steve walked you through how this work is showing up in our margins. In a moment, I will share a few more of the operating measures behind it.
On the second track, our AI prior authorization solution is now live in production, and I will come back to it in a moment. In the emergency department, we added a cirrusAI Notes Companion app in Wellsoft and expanded our Breeze patient experience integration. We are also continuing to integrate the inpatient product suite we added through Medsphere and MAP App, which extends our reach beyond ambulatory care. On the third track, Steve introduced LailaCare, so let me go a level deeper. KabaFusion is one of the nation's largest providers of home infusion therapy, serving patients in 49 states through a network of home infusion pharmacies, ambulatory infusion suites, and home health agencies. As of early this year, it operated 33 infusion pharmacies and 21 ambulatory infusion suites. LailaCare is an AI-native platform for home infusion and specialty pharmacy.
It brings referral intake, eligibility and authorization, patient engagement, and revenue cycle management together on one platform. CareCloud is designing and developing the platform, supported by our AI Center of Excellence, and KabaFusion will own it. What matters here is the scope. This is not one AI tool added to an existing workflow. We are building the system the business runs on, from referral to payment. As we said last quarter, we will report AI revenue separately once it reaches scale. This slide shows where our AI works today, from the first patient call to the final payment. At the patient access stratusAI front desk, our AI voice agent is live with clients and handles scheduling and front desk calls. We also run it in our own patient call center.
There, it verifies the caller's identity as HIPAA requires, answers routine questions such as patient's balance, sends a copy of statement, opens a case for our team when patient disputes a bill, sends a secure link when the patient wants to pay, and routes everything else to the right queue. Demand remains strong, and we continue to focus on implementation quality, depth before breadth. At documentation, cirrusAI Notes uses ambient AI to turn the visit into chart-ready documentation. At authorization, our AI prior authorization solution is live in production with a pilot client, and we are expanding it. Through standard electronic connections, we are connected to 105 payers. 75 of them accept electronic prior authorization submission, and the rest support authorization verification. It has cut submission time from about 15 minutes to under two, and across more than 600 submissions, it achieved a 91% initial pass approval rate.
Next, we are integrating it into CareCloud Health's platform, automating the determination of whether an authorization is required and expanding payer coverage. At coding, AI-assisted medical coding is deployed in the coding services we deliver for clients. We are expanding it specialty by specialty, and more of it goes live this year. Across claim and payment, automation and offshore delivery are handling more of the back office workload. The principle behind all of this is simple. We build and prove these tools in our own operations first, and what works for us at scale becomes a product we can offer clients. Prior authorization is a good example of that path from internal tool to live client product. Steve mentioned the 44% reduction in manual claim touches in the division that serves most of our RCM clients.
In that same division, zero-touch processing has risen to 84%, up from 74% a year ago. Across our RCM operations, our denial rate in the third quarter was under 4%, down from about 8% a year earlier. For context, the major RCM vendors that publish a denial rate report figures of roughly 6%-8%, and MGMA's benchmark for physician practices is around 7%-8%. We are now well below both, at roughly half the industry benchmark. In practical terms, we are handling more work with the same team, which frees our people to support new business as we grow. Let me spend a minute on Medsphere, which brought us CareVue, our inpatient EHR, Wellsoft, our emergency department system, and our inpatient revenue cycle business. Medsphere contributed $6.3 million in revenue this quarter. Since the acquisition in August 2025, our focus has been to modernize these platforms.
Core integration work has largely completed in the first half of this year. In the second quarter, we closed the parity gaps between the legacy inpatient revenue cycle system and RCM Cloud, delivered the committed CareVue parity items, and brought Breeze and cirrusAI Notes live in the Wellsoft emergency department. In the third quarter, we built on that. We expanded both in Wellsoft, adding a cirrusAI Notes Companion app and a deeper Breeze integration, and completed DEA audit certification testing and security hardening. The stratusAI integration into Wellsoft, which I mentioned last quarter, will be completed in the fourth quarter. The modernization of Wellsoft into a full cloud-based SaaS platform remains on track to complete later this year. Across our product portfolio, our teams delivered 36 product releases in this quarter.
That includes 16 enhancements in Marketware, following the 20 plus we delivered last quarter, and nine in MAP App, including advanced features for its AI chatbot. Longer term, our vision remains one modular platform on a shared backend with a common data and AI foundation underneath. That is a multi-year effort, and we will keep you updated as we make progress. With that, I will turn it over to Bonnie to walk you through the financials. Bonnie?
Thank you, Hadi, and thank you, Stephen Snyder, for the warm welcome. Good morning, everyone. I am pleased to be joining you for my first earnings call as CareCloud's CFO. Having joined the company in July, I have had the opportunity to work closely with the team and gain a deeper understanding of our operations, financial performance, and growth opportunities. I also want to thank Norm for his support throughout the transition. Stephen Snyder covered the headline results, so I would like to focus on three things: what drove our improved profitability, how our capital structure is translating into stronger earnings for common shareholders, and our balance sheet and capital allocation priorities. Third quarter revenue was $33.7 million, an increase of approximately 9% year-over-year. Our growth benefited from a full quarter of Medsphere revenue, the contribution from Empower, and initial development revenue from KabaFusion.
These gains were partially offset by lower project-based professional services revenue at medSR. Revenue less direct operating costs improved to 50.5% of revenue compared with 47.8% a year ago, an improvement of approximately 270 basis points. What is particularly encouraging is that revenue grew approximately 9%, while direct operating costs increased only 3%. This reflects a combination of revenue mix and operating efficiencies. We also continue to invest in our technology platforms, including AI capabilities and the modernization of our acquired products, while maintaining discipline across a broader operating cost structure. As a result, adjusted EBITDA increased 28% to a record $9.9 million, with adjusted EBITDA margin expanding to approximately 29%, compared with 25% in the prior year quarter. This is an important demonstration of the operating leverage in our business. We are generating greater profitability as revenue scales.
GAAP net income increased 54% to $4.7 million compared with $3.1 million in the third quarter of 2025. Net interest expense was approximately $1.7 million, including $934,000 of non-cash financing-related expense associated with warrants issued in connection with our credit facility. The remaining expense was primarily related to interest on our term loan, which replaced a substantial portion of the preferred dividend obligations eliminated through our capital restructuring. One of the most meaningful changes in our financial profile is the improvement in earnings attributable to common shareholders. With the redemption of our Series B Preferred Stock, quarterly preferred dividends declined from approximately $1.4 million a year ago to $538,000 this quarter. As a result, net income attributable to common shareholders increased to $4.2 million compared with $1.7 million in the prior year quarter.
Approximately 89% of our third quarter net income was attributable to common shareholders compared with approximately 55% a year ago. That translated into GAAP earnings per share of $0.10 compared with $0.04 in third quarter of 2025. These results reflect both the improvement in operating performance and the benefits of our simplified capital structure. Turning to the balance sheet, we ended September with $4.6 million in cash and approximately $37.3 million in total debt, resulting in net debt of $32.7 million. Our net leverage ratio was approximately 1.1 times trailing 12-month adjusted EBITDA. We also fully repaid our revolving credit line during the quarter, leaving the full $10 million available for additional liquidity and flexibility. Our term loan balance declined to $36.7 million at September 30th, and we remain focused on reducing debt through disciplined capital allocation. Looking ahead, our capital allocation priority is straightforward.
First, continue investing in our technology and AI platforms to support sustainable growth. Second, reduce outstanding debt and further strengthen the balance sheet. Third, pursue selective, disciplined, accretive acquisitions where we see opportunities to accelerate growth and create long-term value. We also continue to evaluate our options for the remaining Series A preferred stock as our financial position strengthens. To close, our third quarter performance demonstrates meaningful progress across several important financial priorities. We are generating strong profitability, reducing debt, and increasing the portion of earnings attributable to common shareholders. Our focus going forward is on accelerating organic growth, sustaining our operating discipline, continuing to strengthen our balance sheet, and allocating capital in ways that support profitable growth and long-term shareholder value. With that, I will turn the call over to Mahmud for his closing remarks. Mahmud?
Thank you, Bonnie. CareCloud delivered record profitability and strengthened its financial foundation. We are firmly focused on accelerating profitable growth, leveraging AI-driven efficiencies, and delivering sustainable shareholder value. We have the strategy, momentum, and the financial strength to execute. Thank you to our team, clients, and shareholders for their continued confidence. Operator, please open the line for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question comes from Allen Klee with Maxim Group. Please go ahead.
Yes, hi. I think you guys explained your vision and execution very well. I had three questions on business-wise, and then I was going to jump back in the queue to later ask questions on financials. To start off with Medsphere, if we look at how it was very good contribution in the quarter, and it moved you into the hospital and emergency department verticals, how do you think about that, like your ability to expand that business both organically within existing customers and then the winning of new customers? Thank you.
Thanks for the question. Really appreciate it. Two things in terms of Medsphere. First, from the perspective of the integration of Medsphere, the overwhelming majority of those integration efforts are behind us, and that is some of the proof that you will see when you look at the numbers. If we think about Q3 being the most profitable quarter in our company's history from adjusted EBITDA perspective, in terms of net income, EPS, gross margins, at least that played a component, that was a component that played a role to ensuring that growth. From the perspective of the future of pursuing those opportunities, we continue to see a lot of those near-term opportunities relating to the expansion of the wallet share relative to the existing customers.
Continuing to sell AI solutions into those existing customers, taking the software-only customers who are only using an EHR or a revenue cycle management platform, and providing them with RCM consulting services or RCM tools that will help augment that overall platform. We would see that as the closest and the nearest-term opportunity. Beyond that, we continue to compete for opportunities in the critical access hospital space and also in the smaller hospitals. Net-net, we look at Medsphere, and we couldn't be happier with it, both in terms of what it's actually producing today and with regard to the near-term and long-term opportunities for growth.
Thank you. Then with compliance, you mentioned how they've been able to bring in revenue cycle management referrals and other areas of growth. Could you talk a little, just in general, of how you think about how this business can grow?
Certainly. Allen, thanks again for the question with regard to compliance. Just for other listeners who may not know the story quite as well, with regard to compliance, we acquired a company called Empower in May of this year. We acquired that company for about one-third of the trailing 12 months' revenue at closing, and the balance of that consideration is really oriented towards a full alignment of that team with our interests, which is really high growth in the compliance space and high growth also from an RCM perspective. What does Empower do? Empower assists providers with coding documentation audits, helps to support revenue integrity compliance programs, HIPAA readiness, and really helps to support the growing area in compliance, which relates to the utilization of AI throughout the practice's workflows. The opportunity here, we think, is really significant.
The part of the opportunity that relates to simply providing the compliance expertise, that really is what Empower is primarily focused on, but I think what you're talking about is beyond the provision of compliance expertise, where are the RCM opportunities for us? Where we really see those opportunities is looking at the types of practices that compliance works with, which tend to be higher growth practices, but they're high growth practices that really need increasingly to have a partner who really understands the totality of the compliance construct and the way that it's growing increasingly, and increasingly implicating the utilization of AI and ensuring that the AI is being utilized in a compliant and an effective way. If you think about Empower itself, Empower reversed more than $1 million of alleged Medicare overpayments for a wound care practice. That was a really significant win.
In large part, because of that win and because of their expertise with regard to compliance, we, for instance, were able to start a relationship with a leading MSO in the wound care space. We signed and implemented and have up and running our first wound care practice. We have multiple other wound care practices that we are in active discussions with, and I believe we will be welcoming as new clients, hopefully in the near future. That is just an example of the way that Empower is not only serving the needs of our customers today from a compliance perspective, but also is really helping us grow from a revenue cycle management expansion perspective as well.
I can add to that on a financial front. Financially, it is high margin with low capital needs, and every RCM win, it generates and adds to our recurring base. Over time, that combination of compliance and revenue cycle makes us a stickier, more strategic partner for our clients and supports both retention and margins.
That is great. Thank you so much. My last business question is just, you talked a little about some of the new product launches that are planning to come out. Could you just kind of help me here and just kind of mention them all in one shot of what are the main ones that we should be looking for over the next whatever timeframe that you have announced? Thanks.
Certainly. Just following up again on compliance, one of the new product launches that we will be launching towards the end of the fourth quarter relates to taking the expertise that exists within the Empower group and converting that expertise into a SaaS platform that can be used not only for the individual client who has retained Empower for consulting services, but more broadly across the entire client base. So that is at least one of the new products that we are getting ready to launch imminently. Hadi, if you do not mind sharing some about some of the other solutions too, that would be great.
Sure. Thanks, Steve, and thanks, Allen. If you, let's say, think about the medical coding, even though we already have an AI-driven medical coding as part of the stratusAI Notes, for the clients, as an example, the primary care who are already using the app, the system, the app does suggest them the diagnosis and the procedures. But when it comes down to the more complex specialties, let's talk about the radiology or talk about the neuro practices, where there are more hard coding involved, a lot more medical documentation needs to be pulled from various locations to do the coding. That's where our AI-driven medical coding solution is coming in. We already have started to use it internally for the practices who we are providing the medical coding services for, and we continue to add and refine more specialties.
The first goal is to cover whatever we work today internally. Same case goes for the prior authorization. We started piloting it with one of our existing larger clients. Internally, we are, instead of manually submitting their prior authorization requests and verifications for a certain number of payers, it's being through our AI-driven prior authorization, which is a combination of the electronic connectivity and AI ascertaining where it is required to obtain a prior auth, and then submitting the required documentation to obtain the prior authorization and then continue to track it. We believe that's another thing that we will be able to scale and expand. The third one is the, if you think about more from the integration into this Medsphere opportunity, as to your earlier question, to support that earlier question as well. Our stratusAI FDA, that continues to gain attraction. We are signing clients.
We are actively implementing and expanding there. This integration into the ED, and if you think about it, the ED has a much higher volume patient request compared to a regular physician practice. Many times it's just like a one-off, a one-time relationship, and that's where the stratusAI becomes even more valuable compared to a typical physician practice. We do see continue to have those integrations in Medsphere, whether it's stratusAI Notes, whether it's FDA. Then overall, as we shared the manual touches, our goal is to get it to almost zero touches manually.
It covers various aspects from initial intake automation to denial predictions with the help of more efficient denial prediction with the help of AI, and then even from the payment processing and posting perspective, even if any certain small percent comes to an EOBs, AI just basically takes care of it from converting into a systematically importable ERA. I think from an excitement perspective, one is we continue to offer these backend optimization with the help of AI, which eventually will be available for our SaaS-based customers as well. Then between medical coding, prior authorization, our stratusAI FDA, and on the clinical side, stratusAI Notes, we are excited about all of these products.
Thank you very much.
Next question, Lisa Thompson with Zacks Investment Research. Please go ahead.
Hi. I have got lots of questions. This has been a very busy quarter. Just to understand this whole Empower thing, how does one overpay a million dollars, and how does Empower found that? Is that a new customer? They just walk in and said, "You are doing it all wrong?" Or did AI go, "No, no, this does not look right"? How does that work?
Understood. Great question, Lisa. As an example, the majority of the Empower clients, first of all, start with a problem. There is an existing problem that has been identified potentially by a payer, and that problem does not necessarily mean they did anything wrong. The problem simply means that one of the payers, Medicare or one of the commercial payers, is pressing them for support, substantiate the overall claims that they have either submitted and already they have already received payment for, or the claims they have submitted and are yet to receive payment for. That is where the majority of these customers really arrive from.
Sometimes they go and retain counsel who is an expert in these areas in the healthcare space, and that counsel then refers them to us because we are a well-known entity that provides this sort of guidance and really understands the ins and the outs from a compliance perspective to support reimbursement. Sometimes they find Empower instead not through an attorney, but instead because Empower is a well-known entity and can provide the expertise along these lines. But once that overall appeal or the overall audit has been favorably resolved, to your question in terms of resolution, what Empower does is Empower goes through, does the heavy lifting associated with actually reviewing the individual claims. Then being able to identify the fact that there is adequate support for payment with regard to those claims.
Once it is able to demonstrate that, as an example here, it is able to turn back the $1 million in alleged overpayments because the payer is in a position where they have to acknowledge that there is substantiation to support the levels of request for those reimbursements. But then the RCM opportunity then presents itself because now the problem has been identified and they understand that on a go-forward basis, it is important that they really understand how to do their very best to ensure that from a billing perspective, they are properly documenting everything, and that proper documentation is not only knowledge, but it is also utilizing a process and utilizing AI to ensure that the records actually support the totality of what is required in order to obtain reimbursement.
Okay. Fascinating. Just wondering with all these fraud investigations that you people are in the perfect spot to be able to detect what is going on and maybe prepare customers for doing everything right before the. Interesting. Okay. Go ahead.
I was going to say, you are 100% right, and really that is our vision. If you think about this product that we are launching towards the end of this year, that is really our vision, to take that same knowledge and to make sure that knowledge finds its way across our entire portfolio of customers in the context of a SaaS solution that can support them from a day-to-day basis. That is at least the vision that we are striving for.
Sounds pretty exciting. All right. Let's get back to finances because I am not understanding how your expenses came down so much, and are we expected to think that that is going to stay down there, like way below $30 million a quarter?
No, great question. I will let Bonnie jump in on that. To your point, if we look at Q3 again, without a doubt, it is the most profitable quarter, certainly since we have been a public company, and even before being a public company, it is still the winner, both in terms of adjusted EBITDA, in terms of gross margins being at greater than 50%, net income, EPS, and the like. As Bonnie said, part of that is really driven by the fact that we are increasingly seeing the net result of our AI, of our automation, of our technology platform helping us reduce costs. Part of that relates to the fact that we have now almost completely integrated Medsphere. That is part of the story, but Bonnie, if you do not mind providing some more context, that would be great.
Yeah. Thanks, Lisa. Our total operating expenses came down about 2.5% year-over-year to $27.2 million, while revenue grew 9%. That is real operating leverage, and it came from a few places. First, our direct operating costs grew only 3% on 9% revenue growth. That is really AI and automation in our revenue cycle operations, along with our global delivery team, let us handle more volume with the same headcount. Second, R&D expense was lower. More of our engineering work went into modernizing the Medsphere old platform, but really the Medsphere platform, and building the AI capabilities, which we capitalized and shifted more of that as well to our global team. Our total development spend is still up from last year. Then third, depreciation and amortization declined about $9 million as the older software ran off, and our G&A expense was essentially flat.
We are growing the business without adding overhead and continue to invest selectively in sales and marketing, invest in sales and marketing to support growth.
Lisa, one of the things, going back to Bonnie's point, we live it every day, we know it internally, we see it internally, but if you think about just AI and automation, when we talk about that 44% decrease in, this is over a period of a quarter, 44% decrease in manual touches, what that actually means is there are more than 200,000 manual touches. Instances where a human being had to go touch a claim that occurred four months ago, but still would occur today. That is actually just part of the story because throughout the organization, the AI, as it is being more fully incorporated into our process flows, it is really enabling us to do substantially more with substantially less. Again, we are very optimistic as we move forward.
Is there a possibility for expenses to go down further, or is this going to be kind of the bottom?
I do think we will keep overhead tight and at the same time keep investing. Our financing costs will come down as we continue to pay the term loan every month and try to prepay, we will prepay that. We will continue to use cash, but in terms of spend, keep that stable, yes.
To Bonnie's point, directionally, definitely the costs will continue to come down. Again, as you are thinking about it, of course, be thinking about things like seasonality. Seasonality in the fourth quarter, generally speaking, there is seasonality. There is seasonality in the first quarter where the revenue is down a little bit more. All things being equal, without a doubt, directionally, we are becoming a far more efficient AI-first company. Absolutely, you will see that on a go-forward basis in the results. Of course, factor in also just seasonality from the perspective of models and the like.
Given that, what is your feeling about spending next year? Should we just take the fourth quarter and multiply by four? Or how do you think it is going to be implemented?
No, great question. Again, directionally, that is why I would say directionally, we are already a more efficient company and becoming more efficient by the day.
Right
That will continue to be seen into the next year. From a guidance perspective, we will, as we always do, we will provide guidance for next year during the next earnings call. Certainly directionally, I would say that AI will continue to play an increasingly larger and larger role. Once again, for guidance this year, we have reaffirmed the guidance, of course, and we are optimistic that we will be able to achieve that.
Okay. I guess my last question is, the guidance, you give three numbers, right? Of the three, which do you think has the best chance of overperforming? Because it is hard to kind of balance them and all get it, especially when you are spending so little money.
Yeah. Good question. I am going to let Bonnie take a crack at that.
We are pretty confident that we will meet all three. I mean, for Q4, we are on track. There is going to be some slight seasonality, as Steve hinted at, but the principle will stay the same. So, on track to meet [inaudible] .
Lisa, one thing to think about. My apologies. I was going to say, one thing to think about is, again, if we think about last quarter, I think the market understandably looked at our numbers for the first half of the year and said, "You are reaffirming guidance, but I am looking at your first half, and my goodness, you are going to have to do substantially better in the second half of the year." We looked at the numbers, we understood the business, and said, "We believe we actually will do substantially better in the second half of the year." Having said that, still, if we look at the fourth quarter where there is some seasonality, and we consider the overall business, we will continue to see these same trends roll forward into the next quarter.
From a guidance perspective, my thought would be to continue to think about achieving guidance, but to be modest in the overall perspectives with regard to the three factors.
Okay. All right. Thank you. Taken up your time. Thanks.
Thank you.
We have a follow-up from Allen Klee with Maxim Group. Please go ahead.
Hi. Your IT consulting business, which had been challenged in the past, do you view that as stabilizing at this point sequentially, or any thoughts on that?
Yes, we do, Allen. We view that as stabilizing sequentially as we look forward. We view that business, I think you are talking about the medSR business.
Yeah.
We view that as stabilizing. From an IT consulting perspective, and more generally, from the perspective of AI consulting and the like, we really see that as a growth opportunity, as exemplified by Hadi's comments with regard to LailaCare. There is a real opportunity to continue to lean into that, to continue to pursue these relationships with sophisticated enterprise customers in our space that are PE-backed, where there is really significant opportunity for growth. That would be the other way to think about IT consulting. First of all, would be thinking about the lower margin medSR side of the business, which has IT consulting, but then IT consulting relates to consulting for hospitals who are leveraging other platforms. I would think, in terms of thinking about our company on a go-forward basis, to really consider the potentially significant opportunities that exist for LailaCare-type relationships.
LailaCare really exemplifies this model, but is just a tiny fraction of the overall opportunity that exists in the market.
Okay. Just going back to questions that were asked on fourth quarter. Fourth quarter, there are more holidays, so there is less billing, so all else being equal, could be sequentially down. You also have the benefit of the acquisitions that have not fully anniversaried and new products. Is there a way to think of, like, if maybe this year is different as a result of that on the top line, maybe not declining sequentially? Or is that too much minutia for you to go into at this point?
Yeah. I would say if we instead kind of step back and say, okay, let's look at the overall guidance of $128 million-$132 million in terms of revenue, the $29 million-$31 million from the perspective of adjusted EBITDA, and this $0.20-$0.23 from an EPS perspective. If you really focus in on those numbers, that is our belief in terms of where we will be able to achieve. If you kind of even, again, peel back those numbers some, like think about from an EPS perspective, that means that during this year, we will be producing EPS that is twice the size of last year or more.
The profitability metrics that we just spoke about, the records that we have achieved during this quarter, if we simply hit the low end of that guidance from an EPS perspective, it still means we will generate twice as many cents earnings per share for our customers. If you kind of step back even further and think about the overall capital structure, what that really means is two years ago, $15 million was already accounted for because that was going for shareholders. You think about today, not $15 million, that number is 90% less than that, or it is approximately $2 million. The rest of that benefit is flowing directly to the common shareholders. You will continue to see the improvement from a performance perspective, and I think that improvement will really inure to the benefit of the common shareholders in a way that it never has.
I would say even beyond that, to Bonnie's point, our priority is continuing to make voluntary payments, just like we did recently, where we are only six months into this term loan obligation. In terms of the overall credit facility that aligned, we have completely paid the $9 million that was borrowed on the line. In addition to that, we have paid a significant portion of the overall term loan, and we have made an additional payment on that term loan. Again, we are hopeful that as we continue to generate cash, we will be able to use that cash not only for accretive acquisitions, like Empower, that will have the flywheel effect of helping us also grow the other parts of our business, but we will also be able to utilize some of that additional cash flow and capital to further pay down our term loan in advance of our obligations.
Okay. Thank you very much.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.
Thank you.