Description

This idea is a high teens IRR idea into a high quality company. Given the valuation, it won’t be for cigar butt / fort knox bros, and more suitable for compounder bros. 

Waystar is a leading provider of cloud-based revenue cycle management (RCM) and healthcare payments software solutions for hospitals, health systems, and ambulatory care providers. The platform streamlines billing, payments, and reimbursement processes for healthcare organizations, enabling them to collect revenue more efficiently, improve patient experience, and reduce administrative costs.

Waystar has two core segments, software (50% revenue) and payments (50%). 

Software: A highly recurring revenue stream. Provides financial clearance (e.g., insurance eligibility verification, price estimation), claim management, denial management, revenue capture, and analytics. This is provided via its SaaS-based RCM platform. These contracts typically span multiple years, providing revenue visibility and stability. This is a classic software business with 80% gross margins and 50% EBITDA margins. 

Payments: A re-occurring revenue stream. Fees tied to transaction volumes, such as patient payments and claims processed. As healthcare utilization increases, Waystar benefits from higher transaction-based fees. Volume-based revenue is often driven by factors such as increased patient payment activity and provider transactions on its platform. Payments earn 60-70% gross margins and about 30+% EBITDA margins. 

Both software and payments are highly complementary that supports cross-selling opportunities. Waystar’s contracts with clients often combine both subscription fees (SaaS) and volume-based fees. While subscription revenue provides a predictable, recurring stream, volume-based revenue grows as clients expand their usage, such as processing more transactions.

There is significant cross-selling potential between these segments:

1. Growth from existing clients: Many clients start with one solution (such as a subscription to provider solutions) and later expand to include volume-based services like patient payments processing. This creates opportunities for Waystar to increase revenue from the same client base by upselling them on additional solutions.
2. Recurring Revenue Visibility: Waystar reports strong net revenue retention (NRR) rates, typically around 109%, driven largely by cross-sell and upsell initiatives within its existing client base. The ability to cross-sell and upsell to current clients offers significant potential for revenue growth.

Waystar's strategy includes leveraging its subscription services to encourage the adoption of volume-based services, and vice versa, allowing the company to deepen its relationships with clients

Market share has been increasing, capturing market share, especially in the ambulatory segment (8%-9% market share) and hospital market (4% share).

Adjusted EBITDA margins have been consistently strong, averaging 40%-42%. For 2024, Waystar is expected to generate $360-$368 million in adjusted EBITDA, growing to around $380-$402 million by 2025​. Free cash flow is strong as well, with $250-$286 million in 2024, growing to $313-$369 million in 2026.

High FCF conversion of ~75%, with low capex ~2% revenue 

There are no pure-play competitors, but Waystar competes with: 

1. Revenue Cycle Management (RCM) Technology Vendors:
   1. These competitors specialize in revenue cycle management solutions and often offer similar functionalities to Waystar. However, many use legacy technologies and focus on specific care settings.
   2. Examples: Change Healthcare, R1 RCM.
2. Point Solution Vendors:
   1. These vendors focus on specific components of the healthcare payment workflow (e.g., patient payments, claim processing) rather than offering an end-to-end solution like Waystar.
   2. Examples: Zelis, Availity.
3. Electronic Health Record (EHR) and Practice Management (PM) Systems Providers:
   1. Some EHR and PM providers also offer revenue cycle management solutions, which can compete with Waystar’s offerings. While Waystar integrates with many EHR and PM systems, some also act as competitors.
   2. Examples: Epic, Cerner (Oracle Health).
4. Internally Developed Software and Manual Processes:
   1. Large healthcare providers may choose to build and maintain their own proprietary internal systems to manage their revenue cycle, bypassing external providers like Waystar.
5. Outsourced Billing and Revenue Cycle Services:
   1. Some healthcare providers use third-party vendors for billing and RCM services, bypassing technology platforms entirely.
   2. Examples: Optum360, Parallon.

Investment Thesis: 

1. Leadership in the Revenue Cycle Management (RCM) Market: Waystar holds a leadership position in the $15 billion healthcare RCM software market, with significant growth potential as the market expands to $20 billion by 2027. With around 4-5% penetration in the hospital sector and 7-8% in ambulatory care, Waystar has ample runway for growth​​.
2. Strong Financials and FCF generation: Waystar has consistently delivered solid financial results. In Q2 2024, it reported $234.5 million in revenue, a 20% year-over-year increase, driven by strong subscription and volume-based sales​​. The company’s EBITDA margin has remained robust at around 40%, reflecting its profitable business model​​. Revenue growth should continue at least at 10-11% annually, supported by strong net revenue retention (NRR) of 108% and cross-sell opportunities​​. As mentioned about, strong free cash flow generation through EBITDA conversion 
3. Recurring Revenue and Client Retention: Over 99% of Waystar’s revenue is recurring, with a balanced mix between subscription and volume-based revenues​. Its large client base, including over 30,000 healthcare providers, reflects strong retention and growth potential within its existing customer base, which includes top hospitals in the U.S.​​. The high NRR and multi-year contracts provide clear revenue visibility​​.
4. Cross-Sell/Upsell and Long-Term Growth: Waystar’s ability to cross-sell and upsell within its existing client base, alongside a growing total addressable market, positions the company for continued expansion. Its leadership in patient payment solutions and integrations with major healthcare IT systems (e.g., Epic, Oracle Cerner) enhance its competitive position​​.

Valuation

Here comes the fun part. Waystar is not that cheap. It is trading at 15x 2024 EBITDA, but going to ~14x next year. At the rate it is growing, multiple should go to ~10-11x in next 2-3 years, with an even stronger market share. 

Comps like Veeva, a pure play healthcare payments and infra software, trade >30x. That is aspirational, but Waystar grows almost as fast as Veeva, and will be overtime as mix shifts more towards software, which is where Waystar wants to grow. 

Another way to look at this is it is a ~7% FCFE yielder that is i) growing at 10% a year, and ii) levered to rates which is a catalyst. 

Furthermore, it is a recent IPO, which means that it is only eligible for indices after the 6 month and 12 month anniversary, providing a stronger uplift. 

Catalyst

Continued earnings execution, reinforcement of market leadership and network effect moat, high ROICs compounder

Indices inclusion 

Rate cuts causing software re-rate