Waystar Holding Corp

NASDAQ:WAY

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Waystar Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Sandy Draper, Head of Investor Relations. Please go ahead.

[Alexander Draper, executive]

Thank you, operator, and good afternoon, everyone. It is my pleasure to welcome you to Waystar Holding Corporation's Third Quarter 2024 Earnings Call. Today's call is being webcast and a replay, along with the transcript will be available on our website, along with other related materials following the conclusion of this call. Matt Hawkins, Waystar's Chief Executive Officer; and Steve Oreskovich, Waystar's Chief Financial Officer, are joining me today. After their remarks, we will open the call to your questions.

Earlier today, we issued a press release announcing our financial results and a presentation slide deck to accompany our prepared remarks. The materials are available on the Investor Relations section of our website at investors.waystar.com.

Before we get started, I will remind you that this call contains forward-looking statements which include all statements that are not historical facts. Examples of these statements include expectations of future financial results, growth and margins. These statements do not guarantee future performance and involve a number of risks and uncertainties, and undue reliance should not be placed on these forward-looking statements. Actual results may differ materially from those expressed in these statements.

For a full discussion of the risks and other factors that may impact these forward-looking statements and our business generally, please refer to this evening's press release and our prospectus filed with the SEC on June 7 2024, and in other reports we file with the SEC, all of which are available on the Investor Relations website page of our website.

Any forward-looking statements provided during this call are made only as of the date of this call, and we undertake no obligation to update or revise such statements except as required by law. During today's call, we will also discuss certain non-GAAP financial measures, which we believe may be useful in evaluating our financial performance. We have provided reconciliations of adjusted EBITDA and non-GAAP net income and earnings per share and certain other non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with the explanations of these measures in the appendix other presentation slide deck and our earnings release. These non-GAAP measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

Lastly, we are pleased to note our participation in the Evercore ISI Health Connects Conference in Miami and the Barclays Technology Conference in San Francisco, both in December where we look forward to engaging with many of you.

With that, I'll turn it over to Matt.

[Matthew Hawkins, executive]

Thank you, Sandy, and good afternoon, everyone. Thank you for joining our Q3 2024 earnings call. Today, I'll cover four key topics that highlight our progress and future direction.

First, we'll discuss Waystar's compounding and sustainable revenue growth. Second, I'll share our improvements driving operational profitability and efficiency across the business. Third, I'll highlight the latest innovations in our software platform that deliver value to our clients. And fourth, we'll review recent successes in our client and team member experiences. Then I'll turn the call over to our CFO, Steve, who will provide a detailed view of our financial materials and annual guidance for 2024.

First, sustainable revenue growth. In Q3, Waystar delivered another quarter of strong top line growth. Our revenue reached $240 million, representing a 22% year-over-year increase and an acceleration from the 20% growth in Q2 '24. We drove this growth through solid client retention, effective cross-selling, new client acquisitions and modest price increases that demonstrate our software's value.

Our sustainable growth strategy prioritizes building enduring client relationships by delivering a tangible return on investment and lowering the total cost of ownership, we drive client retention and ongoing product expansion. This approach is a fundamental part of our proven strategy as evidenced by two key metrics that track our performance and reinforce our durable growth model.

First, net revenue retention came in at 109% in Q3. This result is consistent with our historical range of 108% to 110% over the last 13 quarters. Second, the number of clients generating more than $100,000 in trailing 12-month revenue grew to 1,173, an increase of 14% year-over-year.

Our Q3 growth reflects our success in attracting clients seeking a reliable clearinghouse after the February cyber event that impacted a competitor. As we shared in our previous earnings call, we welcomed more than 30,000 new providers to Waystar, rapidly implementing them to ensure they quickly resumed cash flow. Many of these providers have signed standard Waystar business agreements with 2- to 3-year terms and are already expanding their use of the Waystar platform beyond clearinghouse capabilities.

Our sustainable growth strategy prioritizes cybersecurity. Waystar demonstrates its commitment to system resiliency by investing in advanced cybersecurity measures that protect our clients' information through proactive monitoring and rapid restoration, ensuring operational continuity. Waystar's software is essential to providers' business operations and cash flow generation. Waystar advocates for system resiliency through nonexclusive connections that deploy modern technical protocols to enable providers to exchange information securely and efficiently with payers. We believe that exclusive relationships between some payers and clearing houses may contribute to a lack of system resiliency.

So far in 2024, Waystar has established dozens of new direct connections to payers, enhancing our extensive network of payer connections. Many of these were previously exclusive with a competitor's clearinghouse. These direct connections are nonexclusive and increase the speed of payment and improved network resiliency. Our focus is to create an efficient exchange of information, allowing providers to prioritize patient care.

Moving to profitability and efficiency. This quarter continues the trend of strong EBITDA performance. Adjusted EBITDA reached $97 million, reflecting a 19% year-over-year increase and a 40% adjusted EBITDA margin, including a full quarter of public company expenses. This performance highlights the value of our software platform and our commitment to vigilant cost management while we continue to make strategic long-term investments that position Waystar for future growth.

Our Q3 performance also highlights our business model's strong cash flow conversion. We experienced a step-up year-over-year and quarter-over-quarter in unlevered free cash flow, which increased to $89 million in Q3. The improvement underscores our operational efficiency and focus on cash collections.

Due to the growth in EBITDA and additional debt pay down, we successfully lowered our net leverage ratio to 3x, compared to the 3.7x at the end of Q2 2024. Waystar's cash flow profile continues to provide us the flexibility to evaluate internal investments, explore M&A opportunities and reduce debt. We remain committed to leveraging our strong position to drive sustainable growth and maximize value for our investors.

Next, I'll speak to platform innovation. The inefficiencies in health care are unsustainable. 63% of revenue cycle leaders indicate that their teams are understaffed, highlighting a pressing need for mission-critical solutions that promote automation and the reduction of manual work. Recent market research conducted by modern health care in collaboration with Waystar underscores the industry's strong appetite for artificial intelligence, revealing substantial returns on investments for early adopters and forecasting a significant surge in generative AI solutions over the next 12 to 18 months.

Waystar holds a leading position in this transformative landscape with our purpose-built software adeptly addressing complex industry challenges through intelligent automation and delivering demonstrable ROI. We are uniquely positioned to leverage the power of generative AI through our expansive data network which facilitates over 5 billion transactions, spanning approximately 50% of patients in the United States. With nearly a decade of successful AI deployment and ongoing investments in innovation, we are actively working on more than a dozen generative AI use cases in Waystar's Innovation Lab.

At our client conference in September, we demonstrated generative AI software applications and authorization automation, denial prevention and appeal management, which are highly anticipated advancements that we expect to begin launching in 2025. Each use case is thematically designed to help providers achieve additional operational efficiencies, promote more intelligent and accurate interactions with payers and patients and achieve faster time to payment.

Our commitment to innovation is not just a promise but a reality. We launched hundreds of new features and enhancements each quarter throughout our cloud-based software platform. In Q3, we introduced automated workflows to identify missing insurance coverage across the patient financial journey, launched self-service tools that enable providers to manage claims and expedite payer payments and expanded patient payment options, including the use of Apple Pay. These innovations in power providers to receive payments faster, more accurately and more efficiently than ever, positively impacting their operations. Our #1 ranking in client satisfaction across all care settings is a testament to our commitment to innovative excellence and positions us as a trusted partner for providers.

Lastly, I will speak to client and team successes. At Waystar, we prioritize delighting our clients and fostering enduring relationships built on trust. A recent survey revealed that 97% of all respondents believe that Waystar's best days lie ahead, reflecting their confidence in our software innovations like generative AI and our commitment to a secure modern platform. In September, we hosted our annual client conference, Waystar True North, which attracted a 50% increase in attendance compared to the previous year. This event provided an invaluable opportunity for our client community to connect with industry leaders and peers, exchange best practices and deepen their understanding of our software platform.

At the conference, our Waystar innovation lab displayed our latest AI and generative AI capabilities alongside advancements in cybersecurity. Clients experienced hands-on demonstrations of our software, further highlighting our dedication to innovation and client engagement. We also convened our Waystar Advisory Board, uniting a nationwide network of health care executives from leading health care organizations renowned for their achievements and expertise. These members shared valuable insights on market challenges and provided guidance on Waystar's initiatives and generative AI product innovations that advance our mission of simplifying health care payments.

This quarter, Waystar continued to earn recognition as a leader in innovation and a top workplace. We received several [ Stevie ] awards at the 2024 International Business Awards, achieving honors in 4 categories within the software and health care sectors, including the Gold Stevie Award for Company of the Year in Healthcare and the Gold Stevie Award for Best Payments solution. Additionally, we celebrated our reputation as an employer of choice, receiving Best Place to Work awards from the Atlanta Business Chronicle and Louisville business first. For the second consecutive year, Fortune certified Waystar as a great place to work. And this fall, we proudly earned a spot on Fortune's 2024 list of Best Workplaces in health care. Together, these accomplishments reinforce our commitment to delivering exceptional value and position us for continued growth in the future.

In conclusion, we are pleased to report our achievements in Q3 and maintain a positive outlook for the future. As we strategically target a substantial addressable market, we recognize the immense opportunities that lie ahead. Our cloud-based software platform, which features advanced technology like generative AI, combined with our unwavering commitment to exceptional client service, uniquely positions us to achieve sustained durable growth that outpaces the market both now and in the coming years. These advancements not only increase our competitive distinction, but also reinforce our capacity to meet the evolving needs of our clients. Our results affirm our expectation of normalized low double-digit growth as we continue to cultivate a stable enduring growth compounder.

With that, Steve will now provide a detailed overview of our financial performance.

[Steven Oreskovich, executive]

As Matt indicated, we had another strong quarter with all financial metrics showing impressive growth, resulting in an increase to our full year guidance. Revenue increased 22% year-over-year in the third quarter to $240 million. This growth was primarily driven by the strength of our software business model and ability to deliver compounding low double-digit growth. This includes continuing to execute our proven plan to drive cross-sell and upsell with existing clients.

We successfully expanded the number of clients producing more than 100,000 LTM revenue, to 1,173 as of the end of Q3, adding 56 clients in the quarter and increased our net revenue retention rate to 109%. Additionally, we continue to recognize faster revenue than normal from the clients we've rapidly implemented last quarter, who are impacted by the competitor clearinghouse cyber event. These rapid implementations, along with sustained higher levels of transactions from existing clients, generated $12 million of revenue above our normal business model in Q3, which is an increase from the $9 million that positively impacted Q2 results. Seeing these results for the second quarter in a row validates our prior expectation of a notable and a durable increase to our revenue baseline.

Finally, the two small acquisitions in the second half of 2023 continued to modestly benefit the third quarter year-over-year growth rate. While 22% year-over-year growth for Q3, and 20% growth in the first 9 months of 2024 are strong, we continue to see normalized low double-digit revenue growth during these periods when accounting for the factors I just noted.

GAAP net income for the third quarter of 2024 was $5 million, compared to a net loss of $16 million in the prior year. Q3 2024 includes $16 million of expenses associated with the planned relocation of one of our offices. The vast majority of which is a noncash charge. Adjusted EBITDA of $97 million for the third quarter increased 19% year-over-year. The adjusted EBITDA margin of 40% reflects continued investment in the business items Matt touched on to ensure we meet client expectations and ongoing technology advancements.

We continue to steadily improve our capital structure in the quarter, including using net proceeds from the green [ shoe ] exercise, along with $8 million of cash to pay down $111 million of debt. Since the beginning of the year, we reduced our debt by over $1 billion, ending the quarter with $1.1 billion of net debt. On a trailing 12-month basis, our net debt to adjusted EBITDA leverage ratio is 3x, which is down 3/4 of a turn in the quarter and already meets the long-term target we previously articulated.

Unlevered free cash flow was $89 million in the third quarter of 2024. Operating results and working capital management, along with a single quarterly tax payment in Q3, drove the $40 million sequential quarter-over-quarter improvement. The EBITDA to unlevered free cash flow conversion was 92% in the quarter, well above our 70% long-term target, bringing the year-to-date conversion to 65%. Unlevered free cash flow for the third quarter includes a tax burden of $12 million, as we continue to be a full taxpayer.

Our capital allocation priorities remain the same. We expect to continue to delever the balance sheet, targeting approximately 1 turn a year. We continue to invest in the business to drive sustainable top line growth. And we will also look at opportunities for inorganic growth based on our disciplined acquisition criteria.

Looking forward, we are raising our revenue guidance for fiscal 2024 to a range of $926 million to $934 million. At the midpoint, this represents 18% full year growth over 2023 and 12% growth for the fourth quarter. This updated revenue range incorporates the continued performance of the business and the durable uplift benefit of the rapid onboarding of clients as we have described. It also considers the seasonal impact of patient payments processed on our software platform, which are typically higher in the first half of the year compared to the second half.

Finally, while we are seeing a nice pickup in sales activities and interactions with existing and prospective clients, buying behaviors and implementation time lines reflect a more normal cadence, which we expect to continue going forward. We are also raising our adjusted EBITDA guidance to a range of $374 million to $378 million, representing 12.5% year-over-year growth at the midpoint, along with an adjusted EBITDA margin of 40% for 2024. Our expectations for adjusted EBITDA incorporate public company expenses, continued investments in software development, cybersecurity initiatives and go-to-market excellence.

While it will not be our normal pattern to give future year guidance on our third quarter call, given this year's unique circumstances of revenue growth well above our low double-digit target, we will provide our preliminary thoughts on 2025 revenue. We expect 2025 revenue to approach $1 billion. Compared to the midpoint of our '24 revenue guidance, this represents growth in the high single digits on an as-reported basis. And after adjusting for the unique circumstances in 2024, low double-digit growth on a normalized basis. This initial 2025 outlook is subject to the completion of our 2025 planning process and may change. We plan to give full guidance on our fourth quarter 2024 earnings call.

We are now ready to answer your questions.

[Operator]

[Operator Instructions] Our first question will come from the line of Adam Hotchkiss from Goldman Sachs.

[Adam Hotchkiss, analyst]

Matt, to start, I know we've talked a lot about the sustainable wave of larger customers making clearing [indiscernible] decisions post the change cyber attack. It seems like you saw some incremental benefit this quarter, as you mentioned.

Could you just maybe talk about your updated view on how sustainable the elevated demand picture is here? Particularly on the new logo side and after the September conference.

And then, Steve, how did you contemplate some of that in your 2025 initial remarks?

[Matthew Hawkins, executive]

Yes. Thanks, Adam. It's good to hear from you. We -- 2024 has been a unique and a very important year for Waystar. We see our business model working successfully. Our teams are high functioning, high-performing. We've seen our pipeline grow throughout the course of the year, and we're very pleased with the progress that we continue to make in the hospital and health system market as well as in the ambulatory side of the market.

We did experience the phenomenon in addressing the cyber event that occurred in rapidly onboarding clients to Waystar as we highlighted in our prepared remarks. We -- that was a phenomenal time for us. We were able to showcase how rapidly we can deploy the Waystar software platform. We were able to delight clients and as we said, many of those signed standard Waystar or agreements, 2 to 3 years in length. They're already beginning to look at other software modules and begin to use software modules in many cases.

We see that trend continuing. And one of the things that we believe that is on hospital decision-makers' minds is we see that they expect utilization to continue to tick up and they're busy. They are going through a very rigorous process to evaluate their long-term clearinghouse partner. And we're getting invited just given our brand reputation and the trust that we've built and the referenceability that we've built with clients to many prospect and other new client opportunity discussions.

We've seen -- one other comment I'd add is that we've seen an uptick in the number of RFPs and in the complexity of those RFPs. We've seen more and more questions asked about cyber security, for example, and there tend to be more decision makers at the table.

So we look at overall, we'd say anticipated demand is robust. People are focused on smart IT spend. We think that Waystar can play a major role with hospitals and health systems as well as the ambulatory clients that we serve, and we look forward to the future.

[Steven Oreskovich, executive]

Yes. Adam, this is Steve. With regards to your question on 2025, I appreciate the desire for information, but ask for your patience for us to finish our planning process to provide any specifics there and what we plan to speak to them in the next quarter's call.

But what I can provide you is directionally back to the prepared comments that we have seen buying behaviors and implementation time ranges reflect a more normal cadence. And as I said in the prepared comments, we would expect that to continue going forward without putting a time line -- a specific bottom line to that.

[Adam Hotchkiss, analyst]

Okay. Really helpful. And then just a quick follow-up on patient payments. Where did Q3 shake out versus your expectations of a normalization in some of the patient payment activity? It felt like things came in a little bit better than expected on the volume base side. But any more color on the financials there would be useful.

[Steven Oreskovich, executive]

Yes. A couple of things. As you're well aware, we tend to see seasonality between the first half and second half is as patients that are -- pardon me, all of us that are in high deductible [indiscernible] tend to hit our deductibles, reach those in the latter half of the year. That being said, we have seen increased volume and usage of health care services across all of our solutions during 2024, in particular, in the third quarter, above -- slightly above our expectations.

[Operator]

Our next question will come from the line of Stephanie Davis from Barclays.

[Stephanie Davis, analyst]

Congrats on another fantastic quarter. So you mentioned delighting the client with those accelerated [ on burn ] earlier this year. But what learnings did you have for this? And looking forward, are you thinking never again that speed to market was unsustainable, or is there something from that accelerated experience you could leverage to improve your forward onboarding efficiency and differentiate yourself?

[Matthew Hawkins, executive]

Thanks, Stephanie. Yes, we had a lot of learnings come out of this period of time that I think really stand out to us, we were grateful to be in a position to move so quickly, to help these providers who had been impacted, be able to resume normal business operations as we were able to, in some cases, in as little as 3 days, deploy Waystar's cloud-based software and get that into use.

You can imagine we're an organization that's focused on continuous process improvement. And so with the thousands of providers that we were able to help during that time, our solution adoption team and our product teams have all been focused on the incremental learnings, how to automate enrollments, for example, how to strengthen our project management to ensure we do certain things within that project management work that delight clients.

And so we feel like the momentum that we created during that time, being able to showcase the speed and adaptability of our organization. That momentum carries us forward. And we've become even smarter and more focused as an organization, I believe, because of it.

We also see that client referenceability and the fact that we've been able to demonstrate proven partnership, where now we see clients are actually referring their friends, so to speak, and we're getting a bit of the benefit associated with that as we examine our sales pipeline, and we see that increase, and we're grateful for that.

So referenceability, learnings that help us internally. And as we go forward, we highlighted a couple of generative AI solutions. Some of those are designed to help us rapidly deploy software, too. And be able to effectively help clients as they evaluate their payer contracts and rules and be able to rapidly get those in place in the waste software platform and begin to deploy those. So thank you for the question.

[Stephanie Davis, analyst]

I guess related to that word-of-mouth kind of momentum you're getting. Should we think of this quarter as inflection in large client growth as reflective of the existing clients buying more and getting their funds in order to buy more as well? Or is there anything else to call in the uptick?

[Steven Oreskovich, executive]

Yes. Stephanie, this is Steve. I think there's a mix in there of a couple of things. One is you touched upon the expansion of solutions within the existing client base. Transparently, there's also some of those clients that we rapidly onboarded and the revenue -- the time to revenue was faster than we normally see, and that's helped achieve or expand, I should say, the number of clients over [ $100,000 ] of LTM revenue quarter.

It's a healthy mix of both. There's not one that significantly outweighed the other. When you look at the total expansion of the number of clients in the quarter.

[Operator]

Our next question comes from the line of Anne Samuel from JPMorgan.

One moment for your next question. Our next question comes from the line of Sean Dodge from RBC Capital Markets.

[Sean Dodge, analyst]

Yes, and congratulations on another great quarter. On the '24 revenue guidance, I'm just trying to better understand the volume-based cadence for the fourth quarter. Your subscription revenue should be pretty stable, I'd imagine probably up a little bit sequentially in Q4. But then if I look at what that implies for volume base, that means a pretty significant step down like on the order of $7 million sequentially to even get to the top end of your guidance for the full year.

So I know there's -- I appreciate the seasonality, Steve, as you mentioned, in volume based. But directionally, do you think there was that much volume that was pulled forward into Q3? I guess just looking for any more help you can provide kind of squaring in all this and how to think about modeling volume based into Q4?

[Steven Oreskovich, executive]

Yes. Certainly, Sean. So you are correct as it pertains to the seasonality in the revenue from patient payments processed on the software platform. We've seen for 3 quarters now, the volumes and the amount of activity being above our expectations. So as we're looking at specifically to the fourth quarter, what we're thinking and what we've modeled in from a full year guidance, and I should say what it implies for the fourth quarter, is a volume for the full year getting back to what we would have expected.

Now that full year volume and associated dollars are an increase when you look at it from a year-over-year same-store, for lack of a better term, basis. But we are trying to take a prudent approach in our view for the rest of the year, understanding that the first 3 quarters so far have continued running above our expectations.

[Sean Dodge, analyst]

Okay. That's helpful. And then, Matt, your comments earlier on AI and efficiency. You mentioned plans to launch some of those things that you're piloting now beginning, it sounds like next year. If we think about the savings or the efficiency boost you can potentially drive from those, is there any kind of color you can share just to help us understand how meaningful those could be?

[Matthew Hawkins, executive]

Yes. So we will hold on commenting anything specific at this point in time. What I would say, Sean, and we thank you for the question and the coverage, is that we believe that there's real opportunity in launching the generative AI use cases that we've now had a chance to show many of our clients. We have some clients that are participating in co-development work with us. We know that they were getting traction and interest in this. And that's informing how we're thinking about the incremental benefit.

For example, new software modules and potential revenue associated with them as well as some of the efficiencies that as we test these at this point in time. What are we able to help our clients achieve. What are we able to achieve ourselves internally. And that will inform how we think about getting more tactical and detailed around pricing with new modules and/or operating efficiencies to your specific question.

I will comment just one other thought, if it's okay, Sean. There was a recent study done, where the vast majority of decision-makers are not currently deploying really AI at scale or generative AI at all. And yet 90% of the decision makers that participated in this survey suggests that they really want to begin to use AI and generative AI in the near future. And of that 90%, 93% suggested that they'd like to work with a scale partner who they trust.

And so we do feel like [ missed ] all of this learning and active work that we are doing. That Waystar is very well positioned to capitalize on the momentum and interest here. And we're, at the same time, being very cautious and making sure that the solutions that we launch will have tangible return on investment, that would be consistent with how we offer our other software modules within the software platform.

[Operator]

Our next question will come from the line of Richard Close from Canaccord Genuity.

[Richard Close, analyst]

Congratulations. Steve, you referenced the $12 million related to new clients from rapid onboarding. I think you also said something about existing contributing to that. That sounds somewhat new to me. And so I was hoping you could explain that a little bit more, that would be great.

And then do you think the $12 million is sort of the peak and we ratchet down from here considering the pipeline commentary that you just provided as well?

[Steven Oreskovich, executive]

Yes. Thank you, Richard. So I guess a couple of things to your first question. Yes, the $12 million includes both the new clients we onboarded that were impacted by the competitor's cyber event, as well as our existing clients that may have been -- had another portion of their business, whether recently acquired or otherwise, that may have also been impacted in switching and using our software platform to process those transactions through their sister or, for lack of a better term, other organization within the larger company. So it's a mix of both of those. And I apologize if I didn't clarify that, that same $9 million from last quarter is a mix of both of those two items as well.

With respect to sort of the curve or the aperture of the gains above our normal implementation and time to revenue, I often tell people, crystal ball maybe a little [ craft ] when it comes to exactly predicting some of these pieces, but we would expect a continued pull-through in a new setting of the baseline, based on what we've seen these last couple of quarters with respect to our overall revenue.

So does the number look slightly larger, smaller in the next quarter? I don't have that specific to provide but we would expect there's still a continuation and a pull-through, if you look at a normal time line of implementation, which would typically, in a smaller organization, be a month or months. And as you get to a larger, more complex organization with multiple solutions in it could be anywhere up to 12 to 18 months.

[Richard Close, analyst]

Okay. And then as a follow-up, Matt, I was curious, the conference numbers, up 50% attendance is pretty significant. Are there any I guess, metrics historically that you can provide in terms of attendees expanding their relationships with you or anything along those lines?

[Matthew Hawkins, executive]

Thanks, Richard. And what I'd say is that it's our second year of hosting an in-person conference. We call it Waystar True North. It was fantastic. We don't disclose specific numbers here but we love the uptick in participation. For us, we're really focused on creating a community of peer-to-peer learning, of hands-on training and examining our products and looking and getting feedback from these clients and these participants.

We have had a longer history of hosting virtual sessions where we call them virtual waste [ or ] True North. And we'll oftentimes have thousands of people that will join us and participate in those learnings. And so we're still fairly early days, but we love the momentum that we're creating. We love to look out and you can probably appreciate this from my perspective, just to see hundreds and hundreds of people talking to each other and getting the benefit of that peer-to-peer learning.

We kind of feel like we're in this community focused on transforming this part of health care and bringing operating efficiency, bringing automation as a theme and sharing best practices for how to make things better. So we're pleased to be able to help bring that together.

[Operator]

Our next question will come from the line of Elizabeth Anderson from Evercore ISI.

[Unknown Analyst]

This is [ Samir Patel ] on for Elizabeth Anderson. Congrats on the quarter. I was wondering if you could talk to us a little bit about the upsell traction you're seeing on these newly onboarded customers related to the disruption. Are you starting to have conversations about adding other modules and additional products like patient pay? Or is that still a bit too early?

[Matthew Hawkins, executive]

Well, thank you, Samir. I'll speak to that. we are absolutely -- our growth team is very disciplined, focused, high-performing team. We go to market and our focus is to have a portion of our team only focused on new client acquisition and then another dedicated team focused on cross-selling and upselling to your specific question. We organize our teams that way by market. So there's an ambulatory focused team, and there's a hospital health system focused team that's much the same.

And what I'd say is we are -- as soon as we onboard a new client, to your specific question, when they came to us from change, and we onboarded them, we immediately began talking to them about other software modules that they could begin to use, including the patient payment module, but also many others. Eligibility automation, insurance coverage detection and prior authorization, claims management, remit deposit management. There are several software modules that the team begins to talk to these clients about.

And that's kind of our core play. We -- that's why we think there's so much embedded growth on our platform. Because we get these clients are so grateful to work with them. And then we're just very consistently reaching out, showcasing additional solutions. We have ROI calculators that will kind of show and harness the power of each incremental software module that we have the chance to introduce to these new clients and any client. And then we're kind of layering on also client testimonials. And showing others that are very similar to the type of client profiles that we're working with, how others are able to succeed.

And so that's helping us drive existing client engagement and cross-sell, upsell opportunities. and that's why we believe in the embedded growth on our platform.

[Unknown Analyst]

Got it. That makes sense. And then maybe just if you can put some color around the $12 million contribution from the rapid onboarding of the switch of existing customers. Is any of that from upsell? Or is that strictly like clearing house related revenues at this point?

[Steven Oreskovich, executive]

Yes. The vast majority of that is clearing [indiscernible].

[Operator]

Our next question will come from the line of Brian Peterson from Raymond James.

[Unknown Analyst]

This is Jonathan [ McCary ] on for Brian here. So we saw an impressive acceleration in NRR this quarter. I just wanted to ask how durable do you think that expansion [indiscernible] could be going forward? I know you mentioned pricing, but how would you stack rank the products and then the levers of expansion more broadly that drove that metric up this quarter?

[Matthew Hawkins, executive]

Thanks, Jonathan, for joining. Please give Brian our best as well. I think -- our net revenue retention is very consistent. As we noted in our prepared remarks, I think, 13 quarters of consistent net revenue retention between 108% and 110%. So we did notice a little bit of an uptick this last quarter, which we're pleased with.

It all starts for us with gross revenue retention of around 97%. So we start there and our growth algorithm as you unpack it is always a function of a modest price increase given the value that we're delivering to clients and then the cross-sell upsell work that we typically do. And so that's a little bit of overview for how we think about it.

Steve, is there anything you'd comment on specifically in the quarter that we noticed or observed?

[Steven Oreskovich, executive]

Yes. I'd say, Jon, it is an LTM based metric. So it's not specific to any activity in a single quarter. If you think about the prior comment I have made about the volume-based piece running higher than our expectations for the past few quarters now, that is another component, along with the two that Matt had mentioned when you're bridging the gap between gross and the net revenue retention rate. So I think that is also helpful to what we've seen in the third quarter number.

[Unknown Analyst]

Okay. Very helpful. And then I think you guys have done a great job laying out Waystar versus the legacy, and we appreciate you hearing -- seeing more complex RFPs. I'm actually hoping to get an update on how you think you're performing versus more modern players also looking to gain share from legacy. So is there anything that you can share there on win rates or what you're hearing from clients on Waystar versus the more modern solutions?

[Matthew Hawkins, executive]

Yes, thank you. We're one of the more modern solutions, and we like how we're positioned. We won't comment on any specific competitor or what we see.

What we will say is that we are pursuing a large addressable market opportunity that's very fragmented. It's a fact that we are replacing homegrown legacy solutions in many cases and even manual services.

Internally, we track a lot of things, including win rates and decision factors that go into how these clients and prospects are making decisions. And we believe that we're trending well there.

What I'd say is, thematically, I think there are some scale advantages that a player like Waystar can bring to the table. And we are realizing that and that there's a bit of momentum there. In our go-to-market efforts, we're very focused on tangible ROI. What's on the minds of these provider decision-makers in all the heroic work that they do day in and day out, they're focused on operating efficiency, increased automation. They want a trusted partner that this isn't their first rodeo, so to speak, and we can bring a lot of client testimonials and case studies to bear there.

And then they want a cloud-based software approach. And the one thing that we're seeing, Jonathan, is that we're seeing more and more decision makers make the platform software approach. Knowing that they're going to start somewhere in the platform and begin to expand their use of the platform versus a point decision -- a point solution approach. And so while there might be some modern software that might only do one specific thing, I think we see more and more decision-makers leaning toward how do I work with an enterprise caliber, scaled, modern software vendor like a Waystar.

And so we like how we set up to compete. We think that our win rates are consistent with what we've reported in the last several quarters.

[Operator]

Our next question is of the line of Liz Lee from Deutsche Bank.

[Unknown Analyst]

We have been hearing a lot of chatter from both provider organizations about claim denials and payers about claim appeals. Can you talk about whether you're seeing any meaningful trends of either an increase or decrease in claim denial rates and talk about the company's role in helping providers reconcile these denials?

[Matthew Hawkins, executive]

Yes. Thank you, Liz. Denied claims is one of the most unfortunate things that occur in the industry. And we understand the payer side. The payers are trying to prevent fraud, waste and abuse, and we understand that. From a provider perspective, we are focused on helping to deliver cloud-based software that accurately submits claims the first time. And all of the work that we do from pre-service to mid-service is focused on how do we deliver an accurate claim to the payer that the payer can trust and quickly adjudicate. And we talk internally about an efficiency measure there that's correlated to lowering denial rates. And that efficiency measure is what the industry would refer to as a first pass claim acceptance rate.

When you look across Waystar's entire platform, we believe that we have market-leading first-pass claim acceptance rates that correlate to lower denial rates when clients begin using the waster software platform. Additionally, in our efforts to help providers, we offer a denial and appeal management software module that is really helping providers to reduce in the event that a claim does get denied, and we have many use cases that showcase how much Waystar's as clients are able to reduce their denied claim rate.

But even then, when a claim does get denied, we offer a solution that helps automate the appeal, follow-up and management of that. In fact, there's efforts internal to Waystar today. One of our Gen AI use cases is focusing on taking that even further and even automating more of the appeal management and follow-up process for the providers that we work with, in an effort to help them rapidly follow up and get the revenue that they deserve to receive once they perform the health service. And we think that, that will have particular interest for the clients that we're working with.

[Operator]

Our next question comes from the line of Ryan Daniels from William Blair.

[Ryan Daniels, analyst]

Congrats on the strong performance. Matt, maybe one for you. You've discussed when highlighting the uptick in RFPs, you're also seeing more parties involved and more complexity in those deals. So on the surface, it sounds like that could be a good thing with larger, again, more platform-oriented deals. But I'm also curious if that's extending the sales cycle at all or impacting the close rate or if it's still such a kind of urgent area for investment, you don't see that happening?

[Matthew Hawkins, executive]

Thank you, Ryan. Good to hear from you. I hope you're doing well. We -- what I'd say is that it is becoming complex. And so I don't know that it's extending the sales cycle beyond what we would normally experience. There was certainly a time earlier this year where it was so rapid, and we were following up so quickly.

Depending on the organization. If it's a hospital or health system, sometimes those organizations make decisions in 12- to 18-month cycles. And so it's very much a discovery process. We're working to identify all the appropriate people involved in the decision. Sometimes there are committees. So we've oriented our approach to bring the right subject matter expertise to bear, the right tools to discover and then we're proactively leading with cybersecurity. We recognize that, that's [ table ] stakes in the world that we're living in. Modern technology case references and studies.

So we think all of the things that will combine along with the ROI calculators that we're using, will help us maintain consistency in that sales cycle. We are continuing, as I mentioned earlier, to see continued growth in our sales pipeline. And assuming that the sales cycle is resume to more of a normal fashion, and we can continue to have the types of win rates that we've experienced, then we feel good about the momentum and the opportunity we have to compete in this market.

[Ryan Daniels, analyst]

Okay. Very helpful. And then maybe a broader, bigger picture question. Obviously, very successful True North event with your clients. And I'm curious other than what you've kind of highlighted earlier, if there's any really key pain points that clients mentioned? And if there are those things that you think you can meet with the current platform? Or is that impacting your R&D or maybe even your M&A outlook as we go forward?

[Matthew Hawkins, executive]

Thanks, Ryan. One of the real advantages of hosting these conferences. We have an exceptional product management team and technology team and we bring them to the conference to listen, and we gather feedback. And we do hear pain to the question that you mentioned and also to the one that lives from Deutsche Bank mentioned earlier. Denial rates are a big point of concern. Another -- and so we're actively working to address that, as I mentioned.

Another one, Ryan, is just the fact that these provider organizations, they're seeing more utilization and they're still having to manage that increase with the same amount of resources or sometimes even less. And so they're always -- they seem to be looking for how do I introduce more automation as a form of operating efficiency gain within my organization.

And so at our user conference, we have all these little learning pods where we have interactions, and we're listening to the pain points. And then we're checking the box on the things that are already in development that we already have to offer by way of software modules, but we're also informing some of our new product innovation with some of the things that we're hearing and we're encouraged by that. And the reason that we've seen so much interest in the generative AI work that we showed these clients at the conference was because I think that work is designed to attack head on the pain points and reduce some of these burdens that they face for so long.

The last thing I'd say is that we use that same type of information to inform our disciplined approach to M&A and we do have a dedicated team. We are active in the market. We will be very -- we've had -- we believe we've had a history of successful M&A. And we will take a disciplined approach to evaluating certain technologies that we think we could add to the waste our software platform through M&A, to help these providers address the pain points that they face each and every day.

[Operator]

And our next question will come from the line of Anne Samuel from JPMorgan.

[Anne McCormick, analyst]

Maybe just on the volume-based revenue, you had kind of tempered expectations on the second quarter call. I was just curious, were you not expecting utilization levels to hold? And maybe where did that upside surprise come in relative to your expectations?

And then looking out to 4Q and next year, if utilization were to stay kind of similar to where it is now, would that be upside to your high single-digit target? I think earlier, you had said your customers were still expecting utilization to stay high.

[Steven Oreskovich, executive]

Yes, Ann, this is Steve. I appreciate the question. I think, yes, we are continuing to see strong volume-based growth and interactions, continued strong interactions between patients and the providers, which obviously are utilizing our software to generate that volume above the minimums in the contract. So we did see greater, or Q3's actuals did come in greater than our expectations.

To your question about carry-through opportunity, if those -- if that demand within the health care system were to continue, specific to your question, while trying not to speak overly -- too much to 2025, that could be above what our current expectations would be.

[Anne McCormick, analyst]

That's really helpful. And then just -- you've seen some really nice revenue outperformance, and that's obviously translated to EBITDA dollar beats as well. But you kind of stayed around that 40% margin threshold. So curious, is there a leverage potential in the model from faster growth? And just, I guess, how do we think about your philosophy on balancing reinvestment versus leverage?

[Matthew Hawkins, executive]

Thanks, Annie. So we're pleased. First of all, we think 40% EBITDA margins, a nice EBITDA margin, especially as we as we highlighted that we took on a full quarter of being public and having public company expenses. That being said, we're always looking for operating efficiency. We have several active projects with dedicated team members focused on driving operating efficiencies across our business. I'd highlight 2 or 3, and then we could talk philosophically about how we orient ourselves towards innovation back in the business and what to do with the incremental cash that we generate as well.

We're focused on a couple. One, reducing patient payment transaction fees. So -- and exchange -- lowering interchange fees associated with processing patient payments. We have a great team focused on that. The other one or two that I'd highlight is continuing to optimize our payer network, where we get the most efficient direct connections to payers, and there are fee reductions typically associated with that.

And then the third, that's much more longer term, Annie that I'd highlight is, the increase in digital engagement with patients. We've taken a holistic approach to connecting providers to patients for many years. Some of that is paper-based as we've described. We see that over a longer period of time, there's opportunity to digitize that interaction and create more efficiency in our business. And as we do, we're constantly evaluating, do we reinvest for innovation, reinvest for go to market, do we harvest it for cash and use it to delever further to do other things, disciplined M&A as we talk about.

But we're pleased with kind of how we're performing thus far and our commitment is to be vigilant and disciplined in driving operational efficiency in the business.

[Operator]

I'm not showing any further questions at this time. I would now like to turn the call back over to Matt for any closing remarks.

[Matthew Hawkins, executive]

Thank you, Vincent. So just quickly, as we conclude today's call, I want to take a moment in this setting to thank our incredible dedicated Waystar team members. We -- great software companies really take great people and we have incredible people who I'm grateful to work alongside. We have remarkable clients who are our heroes, and we constantly admire the work that they do to care for patients. And we're -- it just inspires our purpose and mission to do anything we can to help them make -- be more productive so they can prioritize more of their time caring for patients.

And we're grateful for both our new and existing investors on this public company journey. This is our second public company earnings cost. So we're learning our way there. We're pleased with our performance and results thus far. We remain focused on executing our game plan. And looking ahead, we're excited about the opportunities that lie before us. We're confident in our ability to execute and deliver strong performance in the quarters ahead. So thank you all for joining us today. We hope you have a great evening.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.