American Well Corporation (AMWL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our next session here at Morgan Stanley's Global Healthcare Conference. I'm really pleased to have American Well's, Amwell's Chairman and Co-CEO, Ido Schoenberg, and CFO and Head of M&A, Keith Anderson, with us here today. Before we get started, please just note that this webcast is for Morgan Stanley's clients only. It's not for the members of the press. And for important disclosures, please see our research disclosure website at www.morganstanley.com/researchdisclosures. I also wanted to take the opportunity just to highlight something that's very close and dear for us here at Morgan Stanley. The Morgan Stanley alliance for children's mental health uses resources of the Morgan Stanley Foundation in collaboration with the experts of our key nonprofit members organizations in this mental health space. And to help address children's mental health specifically for far-reaching challenges of stress, anxiety and depression. And now more than ever, we do need urgent coordinated efforts to prevent the existing global crisis in children mental health from escalating and you can play a role in this effort. We encourage everyone to learn more about the issues that children are facing around their mental health and become advocates for change. And with that, thank you again, Ido and Keith for joining us here this morning. And Ido, I'd like to turn it over to you for some just introductory remarks and just kind of like how frank was the conversation introduced Amwell for those in the open frame of the story as well.

Absolutely. It's good to see you, Ricky. Thank you, everyone, for joining. Ricky, I did send you a deck. I'm not sure if you're able to put it on the screen for everyone or not.

We can't put it on the screen, but we will send it to everyone after the presentation.

Okay. Terrific. So I guess, I have to see me for a little bit. That's fine, too. We live in interesting times. Obviously, a lot is happening fast and furious in our world, in Amwell and in general. Our vision, the digital care delivery, which was from health care is proving to be absolutely correct more than ever already before. We are seeing the new model of care coming to life in front of us, where there is a connection between the really 3 elements, the physical care that is still very, very important, the virtual care, the ability to talk from people from far away and growing the automated care. And none of those components should replace each other, but rather they come together to create a health care experience that is much more efficient and much more effective. But when we look at what we built recently in Converge, we really built a platform that is designed to enable everyone and not to compete with anyone to realize this new capability by working together in a new way. Our platform really was designed from the ground up to enable connectivity across the full ecosystem. So there is 1 core base that is allowing the access to everyone and is designed to work both in a transactional way and in a longitudinal way, it is a hybrid model between those 3 components. Great emphasis was put on integration. We don't want to replace components, whether it's EMR, remote patient monitoring, claim systems, different portals and so on and so forth, but rather seamlessly work with any digital assets that exist to create this electronic glue across the ecosystem. The pattern is designed as an open platform. We would like to feature our own innovation, but very importantly, feature programs and applications from third parties. So they can really expand the use and value of our platform. It's built as the modular component. So people can really implement the right type of Converge that is right for them today, not to forget that there is a future proof opportunity to grow with a greater degree of sophistication. Our typical client uses about 4 modules. And that's really interesting because we have hundreds of modules and programs. So there is enormous opportunity for an upside and value creation for the ecosystem. What we're trying to do is not to offer another service for primary care or for behavioral health. We are really trying to cater for the full continuum of care in a new way that creates a very delightful, simple experience for all the parties and is truly scalable to become part of the backbone of the main pathway of health care in years to come. We are at the beginning of this journey. Amwell Now, which is a seamless component of Amwell was deployed very successfully in the last few months. As we discussed, we are now beginning to deploy the next chapter of Converge on the same platform, which is Converge EHR that is designed to support our hospital provider clients. Later this year and the beginning of next year, we will complete the ecosystem connectivity with employers and payers and expect our -- the lion's share of our customer base to be on this new platform by the end of 2022. That deployment is incredibly important as we really transform Amwell from a company that's focused on health tech services into a SaaS platform company where the revenue mix between services and technology is favoring much more technology. We expect our margin to grow, in the next few years, quite extensively, as number of important trends are happening. And I will maybe list some key examples from the least important, more technical into the more important, more strategic. First and foremost, as I'm sure you noticed, we are offering services that are higher margin, more sophisticated. So if initially, and we focus on primary care, now we offer things like virtual primary care, the ability to have one point of contact in a recurring way, and we can charge more for that. We have more specialty care. We have more behavioral health, for example, in addition to primary care, better margin, better unique value, you should expect that trend to continue. We implemented some interesting advancements in a way that we manage availability on our services, which you were able to see in our last earnings call, core enhancements to the way that we render AMG services. So that part of our business is also moving forward. The modularity of Converge will growingly allow us to replace some relationships that are relatively more expensive with some relationships and capabilities that are better in way of margin contribution. So as we move more and more of our traffic to GCP to the Google Cloud environment, for example, we have here, a long-term agreements that will allow us to operate in a better, more efficient way. In general, I would say that Converge is a much more efficient platform. Our legacy platform, we have a cage in the center for every client. It's a monolete that really requires significant effort in every way in deployment, in support, in maintenance and in hosting. The new platform is cloud-based, service-oriented, multi-tenant, much more efficient. As we build on this singular platform and as you recently heard by our recent acquisitions, we plan to make the platform better, and we also plan to add more and more high-margin programs to it that bring a high degree of automation for our customers. And SilverCloud is a good example. So in addition to the organic efficient growth, we definitely -- there's quite a bit of cash left on our balance sheet beyond the working capital that is required to bring us to cash flow positive status that we are going to deploy, together with our currency, to further allow for more high technology -- high-tech, high-margin growth, it will really add more capabilities to our platform in different therapeutic areas in way of automation. Last but not least, is our ability to really open up the platform through a program store in an app store. So we can really leverage the innovation of other people. This interconnectivity of assets is really the core multiyear value of Amwell. You've got an example recently by the announcement that was made by Cleveland Clinic announced, those amazing organizations were able to offer second opinion services on the same platform using the electronic glue, that the Amwell technologies provided. And now a doctor that is opening endocrinology clinic is making herself available to a Google employee in a National Account of Anthem through this connectivity. Of course, the service connection is only 1 example. We are going to see more best practices, more intellectual property, more programs available across the ecosystem by reallowing helpers to work much more closely with providers to improve clinical and financial outcomes. So Ricky, probably much longer introduction than you bargained for, but that's some notes on current state of affairs.

Great. Thank you, Ido, for that. There's a lot of interest from investors in Converge and they're really trying to understand what client feedback has been. I think you talked about Amwell Now that was deployed successfully. Maybe you can give us some data points around sort of the percent of clients. And then also, when we think about the deployment of Converge, is Converge basically deployed across the entire customer base. And you said hospitals by the end of the year, then health plans, in 2022. Do they opt in? Or is this sort of a deployment just that happens, it's sort of an anomaly deployment across your entire user base?

Sure. So that doesn't count as 1 question, but I'll let it go. These are great questions. Thank you for raising those topics. Amwell Now competes in a fairly tight space where Zoom and Epic video and Teams are operating. It allows for video -- simple video connectivity between the doctor and the patient. And in that world, things like reliability, speed of a access, simplicity are the most important things. And we are very pleased with the reaction of our clients to those elements. It's a very inexpensive product. It only has handful of percentage points of our revenues connected to it. But it uses the very same core of the rest of Converge. So it's a very important leading indicator. Unlike Zoom or Epic video our Teams, the Amwell Now component can grow from here to eternity. It can grow to many more programs and capabilities that are available on the full platform of Converge. And we already see some good signs of appetite from the Amwell Now clients to upsell. In general, we believe that same-store growth is going to be a really important part of our growth in the next few years. We are planning to upgrade the entire installed base of Amwell between now and the end of 2022. We may have a few outliers. They have been the international area like in Israel, where Amazon Web Services is not yet deployed and there are some other technical considerations. But other than that, it's going to be very attractive for every type of client that we have to move to Converge. The actual upgrade is included in your subscription. So there is no financial barrier for you to do that. And we spend a lot of effort to make it easy and simple for clients to do that. Once deployed, the first thing that we expect will happen, is that everybody will have a much better experience that is infinitely more reliable and easy to use than what they have today. And very importantly, a great opportunity to use a slew of new capabilities that were not possible before leveraging the very fundamental secular tailwind in the market of growing demand for digital care delivery.

So you recently closed the acquisition of SilverCloud and Conversa. What are they bringing to the organization that you didn't have before?

So first and foremost, pretty amazing people. We really like them. They share our passion, they share our vision, they share the commitment to transform health care through technology and democratize. Those companies are very different, and I'll describe them separately. Conversa really brings a very important component to the heart of Converge. The main value is to take this very good core that was written over a few years and really make it part of our capabilities. And that part is automation. So Converge already does really good connection to physical meetings like virtual primary care or to virtual capabilities, which we've done for many of our clients. What we didn't have is the capability to have a very reliable operating system like capability to automate interactions with providers, members, consumers, patients. We have that now. So that capability to really extract more value from each provider by not making them manually use their physical time, but rather automate anything that can be automated is a very important capability, a core capability that will be part of our platform by the end of this year. So we have a very aggressive integration timeline and the Conversa technology will be part of our Amwell. Of course, Conversa can also be sold as a stand-alone. They have some nice revenue stream of their own, and we plan to expand it as well. But growingly it's going to be a capability of Converge, the top clients are going to buy as the module or a native capability. Conversa is a company that for the last 17 years, focused on really extracting the value in word enablement in automation in upper half. Saying it in a reasonable way, they can have each provider reach out and take care of many more patients very, very effectively. Now when I say very effectively, this is not my opinion. This was proven clinically time and time and again with very, very sophisticated clients like the National Health Service in the U.K., Kaiser Permanente, United and many, many others. There are many people that have programs, finding a program that will now really translate into improved clinical and financial outcome is not so easy. They have about 30 of those in areas of loneliness, depression, anxiety and many other important areas. This is a beginning of an inorganic trend that we plan to further expand. So as we think about our future, we want to have native apps, native programs on the Converge platform that you can leverage through the entire continuum of care. So other areas are diabetes, heart disease, renal disease, lung commissions and so on and so forth. Some of our very grown-up sophisticated customers like United, Anthem and others have their own progress. And Converge is designed to really make it super easy for them to integrate their existing efforts into our platform. When you go down market into midsize and small clients, they don't have the resources or even the will to begin to create those capabilities. And for them, we would like to be able to have the health solution, if you will, by bringing the best-in-class capabilities. Because Converge provide the features, a long list of APIs and capabilities we are able to find best-in-class programs, but we don't need to buy companies that have very big technology stack, but we can take those proven clinical capabilities and really amplify them for a very, very reliable infrastructure. So if there is a great epidemic medical center like you Kaiser Permanente and the others, we can take their know-how and very quickly bringing to others in security matters. This is not like what we've done with Stanford University a few years ago at the Eberhardt study, where we took their very, very good algorithm to identify patients that may have atrial fibrillation and make it available to about 0.5 million patients. So that's going to be part of our inorganic growth in the next few years.

Ricky, can we take this opportunity to correct what was transcribed in the earnings call. We reviewed the transcripts after all our earnings calls, and there was a misprint to an answer to one of the questions on the earnings call. The question was what is the EBITDA outlook for next year in 2023? We misunderstood the question or the transcript was incorrect. The question was, what was the EBITDA impact from the M&A to 2022, not 2023. We'd like to answer both. It will be neutral to EBITDA in 2023, but a $25 million burden in 2022. And then reiterating the revenue, it will be $15 million on a GAAP basis this year. We are going to recognize 0 because of deferred revenue, growing to $30 million on a GAAP basis next year. So we just wanted to correct what was a misprint in the transcript. Thanks, Ricky.

Great. Thank you. So Keith, just to confirm to make sure that everybody heard it right. $30 million contribution to topline in 2023 and neutral for EBITDA.

No, sorry. Zero contribution on a GAAP basis this year, $30 million on a GAAP basis next year. But because of deferred revenue, they will actually do better. But only on a GAAP basis. So contribution to Amwell's $30 million next year. Hopefully, it will be significantly higher in 2023 because the companies are growing over 100%. On an EBITDA basis, it will be a burden of $10 million this year, 2021, negative $25 million next year and will be neutral in 2023. Thanks, Ricky for clarifying.

Great. Thank you. So we have 2 questions from the audience that I just want to relay. So first of all, is around the timeline and cadence for launching and opening the app store, whether it's this year or next year?

It's next year. This is something that is going to be at the very end of the development cycle.

Great. And then the other question is really about the competitive environment. With the massive growth in telehealth, we've seen a change in competitive environment for telemedicine, but you are also sort of evolving and adding capabilities. So who do you consider as your primary competitors? And the question is, is really when we think about Microsoft or Microsoft Azure for health care with Teams and Nuance. Is that who we should look for as a competitor versus the more traditional telehealth companies?

So it depends. It depends what do you consider as our core business and what is the margin and so on and so forth. What's very apparent, I think, for everybody is that the simple video connectivity business is becoming extremely competitive. Zoom, Epic, Twilio, Microsoft Teams and many others are playing in this field. It's a relatively low margin, and it's relatively commoditized. So if I want to connect from a digital asset like an EMR practice management system with my patient over video, I have lots of choices. Amwell Now is one of them, but there are many others. It's a small part of our business. It's a relatively low-margin part of our business. If you think about us as a platform for very robust end-to-end digital care delivery, from data collection to analytics, to care planning, to patient and consumer engagement, interacting with every party in the ecosystem. We are fairly isolated and fairly -- feel very comfortable that we are fairly unique. We don't think it's very likely for companies like Google, Amazon, Microsoft or even Zoom to really do what we do. It's very -- it requires enormous amount of institutional knowledge and relationships that are health care specific. It took us a decade and half. It took us about $1 billion journey or even more to get to where we are, and we are still working on doing that. We believe that not everybody is ready to deploy a digital care delivery infrastructure. So that will take time. However, we believe that eventually, every single party in the health care ecosystem would need to be connected to this type of infrastructure because the health care delivery will demand. So we think that over the years, we are going to take more and more of the market share of the different players. So to give you an example, it's not unlikely that someone is ready to buy a Zoom connectivity inside their EMR and not buy Amwell Now right now. And we may lose that revenue opportunity in the short term. And they're ready to grow up, if they want to be paid for a closing gaps in care from a health plan or the patient that is sitting just in front of them, we can really have, and those solutions are unlikely to be able to help. If you follow Amwell and you want to see if we are making progress towards our goal in a way of evidence, I would really pay attention to the quality and size of the players for choosing Amwell as their backbone and they should [indiscernible] is something that are likely to switch over because it requires such deep integration. We're very pleased by the reaction of the most sophisticated buyers in the market today that recognize the value of what we are really creating.

Great. Well, Keith and Ido, I wanted to thank you very much for joining us. We are at time. So before we conclude, I mean, either from your perspective, where we think about the opportunity, what do you think is the biggest -- some of the biggest uncertainty that you'll face in the coming year in the near term. But really beyond it, what do you think that investors are missing today, they'll come to appreciate 12 months from now?

It's difficult to realize the future that is not now. And we see the future very, very clearly. Unfortunately, we saw the future 15 years ago, and it took time to arrive. So the speed of change is something that no one can predict, even a guy from Jerusalem with limited prophecy capabilities. The unknown is the speed of adoption. I have no doubt in my mind that providers will work so much closer with payers in order to improve clinical and financial outcomes. And that connectivity is far from concluded. I have no doubt in my mind that all of us are going to experience most of our health care interactions from our homes and connect to a lot of data sources that eventually will allow access to much more affordable, high-quality care. So the mission that we are trying to realize is robust. But like anything, predicting exactly the speed of adoption is a challenge. It can always take longer than anyone predict, but it's bound to happen and the signs of stronger than ever in our history for that future to be realizing faster than what some people may think.

Great. Thank you very much, Ido. Thank you very much, Keith. And for everybody on the line, thank you for your time, again.

Thank you, Ricky.

Thank you, Ricky. Thanks, everyone.