We've got about 30 minutes together. Let's take the first 20 or 25 minutes just to do some fireside chat with the team, which I know is going to be fun. And then we'd love to make this interactive, so anyone that's got any questions, just pop up your hand, and we've got a mic right on the back. So maybe with all of that, Matt, Sandy, thanks so much for being with us here today.
Thanks, Saket. Great to be here.
Happy to have you at our first Barclays Tech Conference, hopefully the first of many.
It's crowded.
Yeah.
There's a lot of action going on here.
Yeah, it's fun, man. Tech's fun. So maybe on that point, maybe just to start, Waystar just had a very successful IPO earlier this year. So maybe for some of us tech investors that are just a little less familiar with the company, maybe Matt, you could provide us an overview of Waystar, what Waystar is, and what problem you're trying to solve.
Sure. Thank you. Waystar is a software company purpose-built for the healthcare marketplace. And as you know, healthcare is a really important part of our industry. It's a $4 trillion a year market. There's over $750 billion of administrative waste in healthcare. And so where Waystar focuses is on provider organizations, so think hospitals, health systems, those providers that practice in a variety of care settings to care for patients. Those providers have to interact with insurance companies oftentimes to seek payment. They also interact increasingly with patients to secure payment, where patients have a financial responsibility to pay. Waystar's purpose-built cloud-based software sits between providers, payers, and patients to create efficiency, to create timeliness, to create accuracy and transparency in the payment process. And we work with over a million providers across every care setting.
We process over $5 billion insurance transactions each year that constitute about $1.2 trillion of gross claim charges, and all of that flows through our software, and we bring market-leading efficiency to bear and accuracy to bear in our quest to help simplify healthcare payments for providers and for patients as they interact with the insurance companies.
That's fun.
It's a big challenge.
Yeah, absolutely. Absolutely. And just an important mission as well. Maybe we'll come back to products in a minute, but you just reported Q3, a second consecutive quarter of beating your estimates since the IPO. Sandy, maybe this question is for you. What were some of the points from the quarter that you were most proud of financially that you want us to know of? And Matt, just sprinkle in anything that we're missing in there as well. So Sandy, maybe you could kick us off.
Yeah. Well, I think one of the things we really highlight is the durability of our revenue growth. So we're thrilled with the results, and we reported 109.5% net revenue retention in the quarter, which is a really strong number that gives us a great amount of visibility. Obviously, above that, we sold tremendously well. The other thing is there's obviously, and Matt will talk about this more, I'm sure, a serious incident in our industry where one of our competitors got cyber attacked, and we've been able to help thousands of providers come online. So we talked about adding about $12 million of incremental revenue. It's a durable revenue base that's important. So it's not a one-time, but a durable lift to our revenue from helping all those customers. That's now $22 million year to date that we've done the lift.
So those are the two revenue components I would highlight. The other thing is we talk about a long-term stated goal of delivering around 40% EBITDA margins. We delivered that for the second consecutive quarter. We feel very confident in that business, and what that allows us to do is generate tremendous free cash flow. So we've now, the third point would be deleverage to the point where we're now at three times leverage. That's a couple of quarters faster than we targeted, gives us a lot of financial flexibility. And so really that the durability, the revenue growth would really highlight that, and we obviously outperformed, which we're thrilled about, but that consistent normalized low double-digit rate built off of that net revenue retention, the margins and the durability there, and the ability to delever and hit that target two quarters earlier. That's what I would highlight.
Absolutely. Matt, do you want to add anything to that?
What I would add is we were thrilled to prosecute this $1 billion IPO earlier in the year. We've made and kept our commitments to delever, as Sandy highlighted. Along the way, we're also doing some really value-creating work in our space. We've announced a collaboration with Google Cloud, working on some very specific use cases around generative AI, bringing even more automation, more organization and prioritization of work, and more accuracy to our software platform. So that's ongoing work. We deliver hundreds of feature improvements to the clients that we work with in any given quarter as a software company, and so these things compound into results over a long period of time. We talk about being a growth compounding business, and we're very focused on our playbook of creating value for our clients and hopefully value for shareholders too.
Yeah, absolutely. Matt, maybe just to zoom out a little bit again, just so that everybody could kind of get to know the business a little bit more. I think revenue is split about 50/50 between subscription and volume-based revenue. Can you just talk about which of your product families are mostly priced to subscription and which ones are priced based on volume?
Sure. And I would add another kind of view, which is we offer our software on a subscription basis to certain types of providers, and other types we have more volume-based relationship. So perhaps we could start there. So in your mind, you could probably picture a group of 10 or 20 primary care physicians practicing together, or a group of orthopedic surgeons or cardiologists practicing together, where it's easy for us to kind of understand that relationship of providers. We offer a per-provider-per-month subscription to use the software modules that they would typically use in their provider care setting. When the provider type shifts, perhaps it's an ambulatory surgery center, or it's a laboratory, or it's a larger hospital or health system, that per-provider-per-month model doesn't work as effectively.
And so we've created a transactional, an insurance transaction volume-based model where we go in, and in the discovery process, as we engage with these large and impressive organizations, that volume model tends to more accurately account for the activity going on in that organization. So we have a transactional model with volume minimums that act like a subscription. And then the last portion of our transactional volume side of our business is actually a patient payment volume business where we're taking a take rate on the dollars of patient payments that we process on our platform. We're processing billions of dollars of patient payments as well. So that's how we think about the business.
We don't necessarily break out which sides are growing faster or better, but both are growing nicely, and we just try to offer our solutions in the ways that make the most sense to the providers that we serve.
Yeah, sure. Sandy, maybe for you, I think as software investors, right, a lot of software investors in the crowd, I think as software investors, we often hear volume, and we think, "Wait, hey, that's not recurring revenue." But this is healthcare, right? So maybe you could just enlighten us a little bit on just the visibility that you have into that volume-based model, if you will.
Yeah. And I appreciate the question. I do think there's sometimes confusion. We have very high visibility on the volume transactions. So when we go in and scope out a contract, we do a lot of confirmatory diligence with the customer, looking at their historical trends for volumes and base the contracts on that. We do a lot of work on our own overall volumes, as Matt mentioned, the billions of transactions we're processing every single year. And so healthcare tends to be a very durable, predictable growth path in terms of utilization in any given year. We're all aware of the aging of America, right? There's more and more people getting older, utilizing the healthcare system more. Healthcare is getting more advanced, earlier opportunities to do diagnostics.
All of that gives what we generally see as around a 1%-2% general growth driver to the business of utilization, and we've got tremendous amounts of data in there. What we do call out is we do have a seasonal pattern in terms of the patient payments, whereas more of us are on high-deductible plans. So at the beginning of the year, you go into the doctor and you have a $500 cost, and you don't meet your deductible, you pay the whole $500. So we're getting paid on a $500 bill. That exact same bill, if it happens in December and you've met your deductible, and you maybe pay $25. So the seasonality we see, or the tapering, or the shaping where we see lower patient payments revenue in the back half of the year is due to that trend.
But the visibility that we have, we see that we can go back and look historically over years at both that seasonal pattern, but also that 1%-2% type general solid growth trend. And so while I understand the question, our visibility and confidence in the way we look at the annual number is very, very high.
Yeah. No, absolutely. I want to pivot a little bit to something that you folks brought up earlier, which is the Change Healthcare cyber event and how that's impacted Waystar. Matt, maybe first off for you, can you just walk us through how you'd sort of quantify the benefits to Waystar's growth and maybe touch on, I think you mentioned this earlier, but I want to make sure we flesh it out, maybe touch on whether those customers come into you on an interim basis until everything is sort of sorted out, or is this a little bit more of a permanent basis?
Sure. So it's a fact that we've been beating Change Healthcare in the market for quite some time. And before this cyber event, we track our win rates and like to compete, and we feel very good about how we've been performing. When the cyber attack occurred, there was just this outpouring of requests for help, and we were grateful that Waystar could be in a position to help. We made a decision very early on in that process that we were not going to modify our normal business relationships or agreements to try to help people on a temporary basis. And so what we've announced is we've helped over 30,000 providers. We haven't disclosed more than that, but over 30,000 providers have moved to the Waystar software platform.
The vast majority of them have signed a typical Waystar agreement, which is a multi-year agreement with auto-renewing features in that agreement built thereafter. And so the vast majority of those have signed them. We highlighted an incremental $9 million benefit in Q2 and an incremental $12 million benefit from the work that we've done in Q3. And we also made a couple of other qualitative comments. We've said that our pipeline has continued to progress through the course of the year. We've grown. We like that. We feel a sense of momentum there. And we've also been able to prove to the market that we can deploy our software very rapidly and that we're very focused on offering cybersecure solutions.
And we recognize how important that is across any industry, but certainly within healthcare. We get an increasing request from providers who want to use a software platform, who want to be able for us to attest for cybersecurity best practices, and we work to do that.
Absolutely. So I actually think that's a dovetail into an interesting question, right? So once we lap this event, which is going to be soon, next year, maybe the question for you, Matt, is how do you think the market share in this clearinghouse space is going to change? And I ask that specifically because you made an interesting comment last quarter about seeing more RFPs, right? So I mean, there's a little bit more daylight since the Change event happened, but you're still seeing a lot more RFPs. So I'm just kind of curious if you're seeing any tailwinds from that breach or whether this is maybe this was a catalyst for additional market share shift. Curious how you think about that.
Yes. So thank you, Saket. So we would characterize this in phases. So we'd say phase one was very urgent. We were taking inbound calls, like very rapid decision-making, sometimes two or three days. A hospital would say, "We need to switch because we can't interact with insurance companies," and they would move to us and implement very rapidly. That was the first phase. What we see now is in this kind of second phase, we see it being much longer. We're living through it. There has been an uptick in RFP requests. We're grateful to be able to participate in those, and that's kind of helped our pipeline continue to progress. It's a phenomenon where we've seen in healthcare over several years, hospitals acquiring other hospitals and buying physician networks to form these integrated delivery networks.
Because of all of that consolidation work, there tends to be a very heterogeneous deployment of technology, meaning they're not all using the same thing. And so what we saw in the early phase was some of those organizations said in one part of their business, "I've got to get off of Change Healthcare and move to Waystar. We've been able to help them." In this second phase, we see these organizations that might have had heterogeneous technology deployments circle back around and say, "We're going to take a long-term view of this. We're going to go out to RFP. We're going to really evaluate who we can move our whole solution to." And we feel like Waystar is well-positioned to be able to have those types of dialogues with these provider decision-makers.
And that's actively going on in this second phase, as well as a longer tail of cross-sell/upsell conversations from the Change Healthcare clients that moved to us earlier in 2024. So I think there's multiple avenues of opportunity for Waystar as we look ahead.
Yeah, absolutely. Sandy, I kind of want to put a bow on this topic around change, but I think Steve last quarter talked about just how activity was showing a little bit more of a normal cadence. Maybe you could just speak to that a little bit and also just connect that to some of the preliminary comments that the team made on 2025 growth, again, as we think about lapping this event.
Yeah, thank you. That's an important point. So during this cyber attack, two things happened. One, not only do we see a dramatic compression of the sales cycle, it was a very dramatic compression of the implementation cycle. Because we are a true software platform on new technology in the cloud, we've always been able to deploy very rapidly. Customers, though, have their own cadence. In this circumstance, we had customers saying, "How quickly can you get me live? Can you literally get me live over the weekend?" And we were working 24/7 and bringing people live that quickly. Now what we said on the third quarter call is we're seeing sales cycles return to normal, but also implementation cycles.
And so when we think about the impact of that, it is we are going back to a normal sales cycle, and then the impact of when we do sign those deals, they're going to come along on a more normalized implementation basis. And so that's another factor, which is why we said on our call, we expect to be approaching $1 billion of revenue next year. Still very confident in the business. If you look at the two-year CAGR, it's 12.5% from 2023 to 2025, but we want to make sure people understand that dynamic in the pattern for 2025.
The lap.
Yep, absolutely. I think that's a really important point. I think it was very prudent of the team to do that early to get ahead of that for what it's worth. So that's it on Change. I want to move on to some more fun stuff, right? So maybe starting with patient payments, right? So I mean, Matt, as you said, a big part of your volume-based business. Sandy, you touched on a little bit on the secular growth in that business, but I want to get your perspective, Matt, on why do you feel like Waystar has a right to win in the patient payment space, if that makes sense?
Sure. Well, when you step back and just look at the phenomenon going on in the United States today, where, as Sandy alluded to earlier, more and more patients are participating in high-deductible health plans, they're having to come out of pocket for the first portion to meet that deductible over the course of a year. Some are uninsured and have to be financially responsible themselves. That's an important phenomenon for us to address. Most provider organizations are not well-equipped to play collection managers, and some of them are having to call hundreds and thousands of patients. So in our quest to help provider organizations simplify and bring transparency and clarity to their forms of payment, part of that's on the insurance side.
Part of that is taking all of this intelligence and knowledge that we generate from the billions of transactions that we process, and we can, with quite a bit of detail, create a very accurate patient payment estimate where providers can use Waystar software to then communicate with a patient and say, "This is your estimated financial responsibility." It starts with the insurance side of our business. So we think we're really uniquely positioned to use that insight to then help providers collect an increasingly important portion of their overall payment from patients. And so they do that using Waystar's Patient Wallet. We help them put a card on file and secure it and then establish patient payment plans.
And what we're seeing is that not only is it helpful for provider collection rates and timing of payment because it compresses it quite a bit, but we're also seeing that delight patients. And that may seem counterintuitive that you get delighted when you make a payment, but I think that's far better than what happens today sometimes where you go to the doctor and 60 or 90 days later you get a bill and you're like, "I don't even remember what that was for. And now I'm responsible for this?" And so we're bringing Net Promoter Score improvement to the patient experience as we help providers treat them more like a consumer. And I think we've got a right to compete there.
Yeah, that makes sense. That "Oh crap" moment happens a lot in my house when we get those medical bills. So I totally understand.
I think we can all relate to that.
Yeah, absolutely.
It's very familiar, unfortunately.
Absolutely. Absolutely. Sandy, maybe just from a financial perspective, it was some helpful commentary you gave just on kind of the unique seasonality of that business, but maybe you could just touch a little bit on the profitability, right? Particularly gross margins. Anything you want us to know about the gross margin impact just conceptually as that patient payments business gets bigger?
Yeah. So thanks for the question, Saket. So the two portions, you think about the provider revenue and then the patient payments. The direct cost to the provider business is around 6-8% of the revenue. The patient payments, it's about 60%, right? So you do have a different revenue mix, and that's the direct cost. What I would say is as we grow in scale, obviously we're looking for ways to get more efficient. That 60%, a lot of that's interchange fees. And so, but as we get bigger, we can work on being more efficient. But we have lots of projects across the entire company where we're constantly looking at driving efficiency to improve gross margins in all the different areas of the business. So the way we manage the business is to the EBITDA margin.
So we have very good visibility in terms of the backlog, where things are coming from, what our pipeline is. And so are we seeing a mix where, "Hey, we have an opportunity to invest in the business and we have the opportunity to do that," or do we need to control because we're really trying to manage that 40% EBITDA? So we see those trends and they're impacting with patient pay. If that's up, that's a drag on the margins, but we still feel very confident in our ability to drive out that 40% Adjusted EBITDA margin given the mix of the business and where we are today.
I might add just one other comment, if that's okay.
Please, please.
We've taken the approach that we just see how important it is to connect providers holistically to patients. And the lifetime value of a patient, we don't talk about that a lot in healthcare, but the lifetime value of a patient is like, I think, $1.4 million. And providers have historically viewed that as a little bit more transactional, but if we can help them view that more relationally, then we think that the patient will come back to the provider in part because they're having a good financial experience. So today, part of that holistic approach is we help providers process paper-based patient statements. It's a fact that a portion of the patient population today still prefers paper.
And so we help them do that, but we think there's a digital health play and opportunity to increasingly convert that paper-based relationship in some cases to more of a digital text-based or other alternative forms of engagement, and we have solutions that help us do that too. But that baseline of having that in place, we think, is very important.
For sure. I want to come back to the 40% EBITDA margins in a second because I think that's really important. But Matt, maybe for you, if we go back to the IPO, I think you and the team were just very consistent in talking about low double-digit compounding growth, right? Maybe the question is, again, for this audience, how do you think about the buildup of that growth, again, conceptually, right? I mean, you have a healthcare market that's maybe growing 5%. You correct me there if I'm wrong. What adds to that? Is it pricing? Is it more product? Is it share gain? How do you think about that conceptually, again, not express guidance?
Yeah. So we're going after a large addressable market opportunity, about $15 billion a year. That is growing about 5% on average. And so when you look at our growth algorithm, I think it does start with what we've highlighted. We create enduring relationships with our clients. It starts with 97% gross revenue retention. And as you walk to our net revenue retention rate of, again, as we've averaged this about the last 14 quarters or so, from 108% to 110%. I think this quarter it was.
108 points, tight range.
Yeah, tight range. And that's just kind of the growth nature of our business. The walk, to answer your question, Saket, is we have an annual price increase of about 3% or CPI from 97 to on our way to 108-110. We've got, just the way we've created the business model, a 1%-2% kind of tailwind of benefit as there's utilization increases or increases in annual patient visits, and we see that continuing over the longer period of time. And then from there, it's cross-selling and upselling to make up the difference on our way to 108-110. And then, of course, on top of that would be any new client, new provider add. So we're growing at faster than the pace of the market. We're gaining market share. We've built a sense of momentum. And you highlighted our commentary around low double-digit revenue growth.
We're just trying to chart our way as a new public company and just keep reminding folks of that as we want to build confidence and conviction in our business model amongst our investors, and so that's what we focus on building.
Yeah, absolutely. Definitely something we see. Sandy, maybe back to you. I mean, we already have 40% EBITDA margins. It's been so consistent. How should we sort of think about margin expansion or where those margins could go over time?
Yeah. So what we look at, Saket, is we definitely view ourselves as a growth business, and we want to be able to invest in the business. So while the business theoretically has margin potential, what we look at is over the next multiple years, we want to be able to grow. So we want to reinvest consistently in the business. And so what I would say is in any point in time, if there's additional margin coming into the business, we're going to look to reinvest that. And that's what we focus. So I would orient people towards that 40%. There's always going to be a little bit. We haven't been exactly 40.0% every quarter.
And so, but around that, it's what I'd really orient you to because our idea would be to consistently reinvest in the business to support that growth and don't look at a consistent year-over-year margin expansion target. That's not the cycle of where we are as a company. We're cycling to grow the top line over multiple years and maintain that 40% EBITDA margin.
And we have a long track record of running the business at that level. And we'll be very intentional if we were to make a decision to say, "Hey, instead of 40% Adjusted EBITDA margins over this next period of time, we're going to run it at 38% or 39% with that incremental spend. This is what we expect to go accomplish with it." We would be very intentional about how we communicate there. But we have some comfort in self-funding several of our initiatives as we find internal operating efficiency gain and then putting that back into innovation and cybersecurity and growth initiatives to create market-leading client experiences for our clients.
No, I think that's a good disciplined long-term approach. So it makes a ton of sense. Matt, maybe back to you. I mean, again, just for the larger percentage of tech investors in the room, I mean, there's just so much regulation around healthcare and payers that maybe we as tech investors aren't as familiar with. As you think about sort of the incoming administration, what are some of the more important policy changes that you're watching that could be either an opportunity or a threat to your customers and to your industry?
Sure. It's interesting. We feel like our business model transcends any political environment to start with. And healthcare is vitally important to all of us, including to the incumbent and future political leaders. That being said, we do work with a third-party firm that's D.C.-based that has a bunch of people in the firm that were former CMS, Centers for Medicare and Medicaid Services, and also Health and Human Services personnel. So we stay very close to the regulatory and policy-shaping environment. They tend to take long in formation. We don't see anything on the horizon that would be disruptive to our business. In fact, we believe we could be an enabler and helpful in helping provider organizations address anything that were to come along, but we don't see anything that we think is detrimental to our business model.
It'll be interesting to see what the current administration does with regards to Medicare Advantage reimbursements, and we know that utilization continues to increase, and they tend to go through cycles that are longer than just a single year, so we're watching that in a way to be helpful to providers. I think we're also watching prior authorization and some policy-level things that could where Waystar could be helpful as we automate a decent portion of prior authorizations that occur that are often required by the payers to providers before they perform certain health procedures, so we feel good about how we're organized there.
Got it. Got it. Well, guys, I think that's about all the time that we've got left. Matt, Sandy, thanks so much for the time. Really appreciate it.
Really nice.
Yeah, absolutely. Enjoy that.
Thanks.
Thank you, Sandy.
Thank you.
Sandy, well done.