Waystar Holding Corp

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 2/5

Waystar provides healthcare organizations with cloud-based software that simplifies payments, enhances revenue and eliminates manual work, with a growing client base.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Waystar operates within the healthcare industry, which, despite some improvements and advancements, continues to show strong barriers to entry due to high regulatory scrutiny, stringent compliance requirements, and large upfront investment costs. Waystar has developed a cloud-based platform to facilitate end-to-end payments for healthcare providers. Key features include automated revenue cycle, accurate claims, and financial transparency across the continuum of care. The company boasts a large client base of more than 30,000 clients, encompassing hospitals, physician offices, and health systems, indicating a well-established presence in the healthcare market, especially in the US.

  • Revenue Distribution: WAY’s revenue model is multi-faceted, including:
    • Subscription revenue: This is the largest portion of its revenue and is recurring from clients using its software.
    • Volume-based revenue: This is earned based on the number of transactions or payments it processes for its clients.
    • Other revenue: This includes revenue generated from additional services and solutions.
  • Trends in the Industry: The healthcare industry is characterized by:
    • Increasing complexity of payments: This is primarily caused by diverse payment models, such as payers, copays, deductibles etc.
    • Technological disruption: This is rapidly evolving the industry with new solutions and services.
    • Shift toward value-based care: The healthcare model is shifting towards pay for performance and value.
    • Regulatory shifts: Changes in Medicare, Medicaid and private insurance rules is having a material impact on companies like WAY.
  • Margins:
    • Waystar is able to sustain a relatively high adjusted EBITDA margin, averaging around 40%-48%.
    • This is due to the highly recurring nature of the subscription revenue model, and the company’s pricing power stemming from a strong value proposition
  • Competitive Landscape: Waystar operates in a highly competitive market that includes large healthcare technology providers, smaller specialized software companies and in-house solutions from providers themselves. Competition is mainly based on innovation, pricing, ability to integrate with different systems and the quality of service.
  • What Makes Waystar Different: The company differentiate itself through:
    • A large, and diversified customer base across all types and size of healthcare companies.
    • Strong data analysis and insights to provide revenue and efficiency benefits to clients, including AI powered solutions
    • A focus on improving the patient experience.
    • Strong integrations with a wide variety of healthcare systems.

Moat Assessment: 3/5 Waystar has a Narrow Moat, based on several factors. The company has created a moat by:

  • Switching costs: Waystar’s platform is integrated into their clients’ workflow, making it difficult and time-consuming to switch to another platform, creating customer lock-in.
  • Scale: The vast network, and high-volume operations gives them a scale advantage.

However, the moat is not deemed “wide” because:

  • Lack of Pricing power: The pricing power is often offset by the increasing competitiveness and the rise of industry consolidation.
  • Technological disruption: Emerging technology may disrupt the processes the company is relying on, so they have to keep investing in R&D to protect their moat.
  • Competition: The market is competitive and new entrants can provide competitive alternatives.

Legitimate Risks That Could Harm the Moat and the Business Resilience: There are several potential risks:

  • Regulatory Changes: The healthcare sector is intensely regulated. This is a double-edged sword; it provides barriers to entry, but regulatory changes can have an immense impact on profitability and growth, including reimbursement schemes and compliance requirements.
  • Technology and innovation risks: Tech disruption is always present and failure to adapt to or incorporate the latest tech could render the platform irrelevant.
  • Competition: The healthcare payments market is highly fragmented and competitive. A number of companies are offering specialized or even similar solutions, therefore, leading to margin pressure and competition for market share.
  • Integration Failures: Waystar’s revenue from acquisitions and roll-ups may not fully materialize if integration is not performed efficiently.
  • Cybersecurity Threats: The company faces cybersecurity risks, given they hold large amounts of sensitive patient data. Any breach can lead to significant financial losses and reputational damage.
  • Economic factors: Economic downturns, can lead to healthcare companies cutting costs and reduce their reliance on outsourcing payment software.

Despite these risks, Waystar has shown some level of resiliency:

  • Diversified customer base: It reduces the dependency on any single customer, or segment.
  • High revenue retention: Their SaaS subscription model gives a level of predictability and retention.
  • Data network: The sheer amount of data gives them a competitive edge.

Financials Reviewing WAY’s financial health shows a mixed picture:

  • Revenue: While the company’s revenues are showing an increase, growth seems to be slowing down, as evidenced by the reduction in the year over year growth.
  • Debt: The company has quite a substantial debt balance. Debt increased drastically from 2021 to 2022 and continues to be high.
  • Profitability: They are making a net loss, despite generating a substantial revenue. However, operating profit is showing improvements.
  • Cash flow: Free cash flow is also negative and continues to be low, even in the first quarter of 2023, although it is better than 2022.
  • Liquidity and Financial Stability: While they have enough cash in hand, a significant amount is used to maintain operations.

Here is a breakdown of some key metrics:

  • Revenue:
    • 2022: $754 million
    • 2021: $613 million
    • 1st half of 2023: $397 million
    • 1st half of 2022: $344 million
    • YoY growth has been slowing down drastically.
  • Net Income
    • 2022: -$185 million
    • 2021: -$167 million
    • 1st half of 2023: -$21 million
    • 1st half of 2022: -$29 million
  • Free cash flow:
    • 1st half of 2023: -$60 million
    • 1st half of 2022: -$176 million
  • Operating Margin:
    • First six months of 2023: 13.5%
    • Full year 2022: 18.5%
  • Debt:
    • 1st quarter of 2023: $2267 million
    • Full year 2022: $2159 million
    • Full year 2021: $1331 million

This indicates that the company is not very profitable and relies on continuous funding to meet the operating expenses and high debt repayment obligations, therefore their balance sheet health is quite weak.

Understandability: 3/5 Waystar’s core business of simplifying healthcare payments is relatively easy to understand, but complexities arise when analyzing their specific tech solutions, the various factors within the healthcare market, and the financial implications. The industry dynamics and regulatory nuances can make full understanding of their business model complicated.

Recent Concerns/Controversies

  • Debt and cashflow: The large debt, and negative free cash flows is a major concern and the company has to show that their operations can be profitable and the cashflows can turn positive. * Management is focused on bringing the operations to profitability, while streamlining operations and cutting costs. * They are looking into more efficient use of resources to get a higher profitability and positive free cash flow.
  • Slowing Growth: While the company continues to be growing, the growth rate has slowed down considerably.
  • Management is focused on organic growth by expanding into newer markets and introducing better product suites.
  • Integration of Acquisitions: The integration of acquired companies and products is a long process and a challenging task for management.
    • They claim that they have a well-developed acquisition framework and are always evaluating new acquisitions.

Balance Sheet Health: 2/5 Waystar’s balance sheet is not very healthy due to:

  • A large and increasing debt pile.
  • Negative free cash flow.

  • Low margins.

  • However, the company has sufficient cash in hand that is providing a temporary cushion.
  • Also, the management is taking active steps to reduce their debt load by focusing on profitability and by potentially getting some cash from divestitures.

Conclusion

In summary, Waystar operates in a market with a moat (though not a wide one), however, the company is not very profitable at the moment and has a weak balance sheet. They need to reduce their debt, and show a consistent increase in free cash flow and profitability. Despite the issues and concerns, the management team is very determined to make the business profitable and create value in the long run. They are also actively looking for strategic acquisitions to fuel growth, which can make the company a very attractive investment if they are able to succeed.