American Well Corporation (AMWL) Earnings Call Transcript & Summary

All right. Room will turn over, but we'll go ahead and get started with our next presentation. I'm A.J. Rice, the healthcare services analyst at Credit Suisse, and we're really happy to have next up in the room, American Well, Amwell. Thank you, guys, for coming and participating.

I have started a lot of these presentations off just to level set people. We're sort of 10 months, almost 11 months into the year. What's been some of the wins for Amwell year-to-date? Have there been any challenges that are worth noting? And then that will frame our discussion as we go forward.

Thank you, A.J. It's good to be here. I apologize in advance. I lost my voice. So if I'm not clear, I'll try to repeat it. It's been a very, very important year for Amwell. The wins include, first and foremost, the buildup of Converge. That's a huge effort that we've done in the last 18 months, and we have finished the year -- finishing the year with a platform that is very competitive that addresses really the entire spectrum of the market and allows us to open '23 in a completely different place than we were only a relatively short time ago. The second win I'd like to mention is migrations. You know that we report that over time, and it's going a little better than our plan with excellent feedback -- excellent feedback from our clients, again, better than we hoped in some ways, including third parties, people like Gartner, Frost & Sullivan and also -- now it's important to understand that we are in time of transition. When you re-platform, your old products are being sunset. Your new product is not ready. That's a time of great risk and vulnerability for any company that does that. And I'm pleased to share that we are able to keep the lion's share of our customers and 100% of our strategic customers. And I don't think that we should take that for granted. We're also able to make some strategic bookings and implement some new customers on the new platform. And that's hard because it didn't exist before. So CVS is the most famous example, but there are others. The challenges were, first and foremost, execution. We had very, very aggressive plan, and then we did lean more than we planned, so there was a lot going on in a time where at least in the first half of the year, the job market wasn't that great. It was very competitive. It was very difficult to operate, and we really pulled it off. And then the macro trends in the second half of the year are not a pleasure, as you all know, especially as it relates to health systems. So that's a little bit about the puts and takes.

Yes. It's great. That's great. So obviously, the rollout of the Converge system has been the big topic of the year and a big part of where the company is going. You've got health plan customers and you've got health system or hospital system customers. Talk about how you're rolling it out to each one of those, how far along you are and how it's going in that initial rollout?

So we are moving forward really according to plan. We started with the low end of the market, called Amwell Now where we have the least differentiation. That product is really fighting against Zoom and Teams and other products. So it was very important for us to get that out of the way. And earlier this year, we migrated 100% of that market segment. We are well on our way with hospitals, with providers, including some of the largest, most sophisticated ones. And we are beginning to roll out payers, and CVS is a famous example. We expect to migrate the lion's share of our customers by the end of next year, by the end of 2023. There could be some laggers, but obviously, there are things we don't control, like the priority and sequence of CIOs versus other projects in the organizations. We do try to really focus on what we can, which is streamlining the implementation processes, but -- as much as possible and allowing ourselves to offer really as much of a white-glove experience to our customers. So far, it's been going quite well.

And even as you're rolling it out, you're continuing to make investments in Converge where it's continuing development to get the system fully to where you want it to be?

So we are really building a platform with very clear focus and strategy. And the platform is a platform for digital care delivery enablement, it's not about video visits or only telehealth. It's really everything that envelops the care process, the main pathway of a healthcare. That means a lot of integration. We really want to make sure that there's many services and data sources of Amwell, of our clients and very importantly, a very long list of third parties are able to operate on our platforms. So we would like to make it incredibly easy for anyone that has anything to contribute to the spectrum in the ecosystem; to care process, it will be super easy for them to implement. We call it apps. And you're going to see a lot of apps on the Amwell operating system, if you will, coming out going forward. So the first line of business is really integration. The second line of business is once everybody is on the same platform, we really want to make sure that we make sense of the data. So we want to create as much as possible a singular health experience. And within the singular health experience, we would like to offer data analytics so we can really understand what's going on and document the efficiencies that we are creating. And later, we actually want to show that the data analytics is actually driving outcomes. So the data itself is going to be a driver for improving financial and clinical outcomes, and that's really the focus of our road map.

That's great. I think on the latest conference call, you said that you were at about 16% of visits were on Converge and that had gone from 9%, I think, previous quarter or previous period. Where would that be when you're fully up and running and optimized on it? And how long do you think that will take for that to occur?

So we are planning to migrate 100% of our installed base to Converge over the next couple of years at most. We are well on our way, as you know, we published the number of visits that are migrating to Converge, the percentage of business that are migrating to Converge. And that continues to go up. As I mentioned earlier, we fully expect the lion's share of our customers to be on Converge by the end of '23. There could be a lagger here and there for various reasons, but we are very encouraged by the enthusiasm of our existing installed base to do this migration.

Yes. And sometimes, it's hard for us is -- I like people to envision exactly how Converge manifests itself in the marketplace. I know you called out a large system in Minnesota that has gone live and some of the ways they're using the system. And I think they even were a testimonial for you at a recent conference. But maybe just use that as an example to talk about some of the things Converge enables them to do?

So we are super proud about what mHealth Fairview said about us publicly, and it was that they really, really love the experience on Converge more than anything else. They scaled up huge volume on the platform. And they said the speed and the user experience, the provider experience, the patient experience is truly -- the deals -- some words I will not repeat, it was very flattering. I'm not going to go beyond what they said for obvious reasons. But I would say that in general, when we look at our hospital clients, they are buying Amwell because of 3 pain points. The first is tough retention. It's very, very tough to get nurses and doctors to stick around these days. The second is efficiency. How can you use digital enablement to improve workflow? And the third is growth. How can they diversify their business model, go beyond their current catchment area, things of that nature? And I would not exaggerate if I said that there are hundreds of use cases. Many of them, by the way, have nothing to do with video visits or telehealth, they are much broader than that. I'll just give you a few examples. So a popular example, many of our customers do virtual emergency room, online triage before you come in to ensure that you go to the right place. Pre-op, post-op is very popular systems that allow for load balancing, provider to provider. For example, if you have a population in the ER and you don't have a psychiatrist or ability to bring in Behavioral Health at the right time and improve -- the flow is very, very popular. Telestroke is another. On the last earnings call, I talked about our system, our work with UCSF, managing this new segment of prelisting of kidney transplant candidates. So they had about 4,300 people on this list and there were so many people in UCSF dialoguing with people who are not on this list. So patients could be candidate but don't really qualify yet. And that was very frustrating for the staff and the patients more than anything else. And with our technology, they created this segment of dialoguing and managing those people, by the way, mostly with AI. There are a handful of navigators from UCSF, but we envelop the entire thing with AI. And as a result, they were able to reduce the list itself by 30%. They were able to engage actively 67% of the pre-list population and already documented saving of over $0.5 million in staff retention and avoidance of unnecessary lab results. And most importantly, the documented outcomes for much better feedback from patients and much better feedback from providers. You're going to see that theme much more actively next year. We are really going to document much more improved outcomes for our customers, which we believe is very, very important, especially in this climate.

That's great. When you -- another thing I note, you talked about Converge gives you is the ability for employers, health systems, health plans, obviously, patients, as you said, to sort of all be on the same system and interacting as appropriate. It may be hard for people that are -- I like people to understand how unique and significant is that versus what's out there? And what opportunities does that sort of create as this rolls out?

So A.J., I really appreciate this question, Because I think you nailed our assets. If there is one thing, I want people to remember after 4 companies, Amwell, is this effort. It sounds easy. It's the most complicated thing we've ever done. And we can go into details for a second. But when you try to connect so many players with so many credentials, with so much regulations, with barriers everywhere in business model, in collaboration agenda, things of that nature, that's very, very tough. But once you do, you fight most important source of inefficiency in healthcare, which is fragmentation. We all feel it, right? When we go, we go to different places, the data is duplicative, the process is inefficient, mostly because it's all over the place. If we had 1 clinic and 1 set of providers, knowing everything about us all the time, the quality of what we would get would be dramatically better. And technology for the first time really in history is able to do that. So we are fighting that by creating this digital glue, that connector, that allows the different systems to interact. Now you asked -- the real question you asked is, okay, great, so why is that important? It's hard to overstate the criticality of the value of realizing what I just said, because in a nutshell, it allows for redistribution of precious resources. And in many ways, it's not unlike what happened in retail and e-commerce. Once you take things that are location driven, that were all over the place and you move them online, you can rethink much more efficient availability management of data and the services. So I'll give you just a few examples. The first one is gaps in care, right? Payers are working day and night to try to understand what's happening with their members and then try to create value-based relationship with providers, so they execute to close gaps in care to improve clinical and financial outcomes. But the sources of data for the payers are mostly claims, and the intervention is mostly financial. Imagine a world where an Elevance member walks into a Cleveland Clinic and the gaps in care are right there inside Epic. And the doctor knows that they're going to get paid in real time for closing that gap in care. The patient herself is in a trusting, focused session with the doctor and the care management nurse that calls me up for dinner to try to manage my outcomes. This is happening in real time in the best possible time between trusting parties, so the opportunity to improve gaps in care is just dramatically different. I'll give you another example, network management. Today, it's location driven. If I am an OB/GYN, a provider in an island in Hawaii, I'm naming my price. I'm the only guy around to do that. And Blue Cross Blue Shield of Hawaii, HMSA needs to really, really negotiate the price that I need to get for what I'm doing. In a virtual world, when you can bring resources elsewhere, you are creating a healthy competition. Not unlike what Amazon did before, and you can rethink the distribution. Routing. When we live in Chattanooga, Tennessee, we can go only to the services in Chattanooga, Tennessee. When you reimagine a digital-first environment, when you go online, there are so many options for you to choose from, whether they are physical, virtual or automated that simply did not exist before. So we often think about I mentioned the example of online retail. Online -- e-commerce did not improve the buying experience in conventional retail. It completely transformed it. It cannot be compared to the previous experience. And we believe you're going to see just that in healthcare over the next few years.

That's good. That's helpful perspective there. One of the topics at the conference has been the economic backdrop and what that means. And for a lot of companies, it's relatively straightforward. You said on recent conference calls that there are some goods and there are some challenges that created by the uncertain economic backdrop. Maybe spend a minute, if you don't mind, just walking through a little bit of that.

No, we all feel the macro, right? It's a time of great uncertainty, and it really affects everyone. In our case, payers seem to be affected a little less. In health systems, significantly more, just as UHS here in this room before. It's really not easy. So there's no question that people are much more cautious when they make buying decisions. When they do, the staff shortages and budget cuts really make them sometimes delay, not dramatically, but we see some delay in making projects go live. And that, of course, could influence some revenues. So execution is a little harder. The tailwind is also, for us, at least, fairly encouraging. We were able, by demonstrating ROI to our platform, really address the main pain points for our clients, especially health systems that I just discussed. And growingly, they see what we have is a must-have. It's not a luxury product. You need to find a way to improve staff retention. You need to improve your workflow in many ways. And you need to think out of the box to maintain growth, client engagement and many other strategic goals. And value of Amwell is very apparent to them, especially since Converge is modular. So it used to be that if you wanted to buy Amwell, you would pay $4 million, $5 million a year. We are here in a reality where you can start by $300,000 to $400,000. It still address some major pain points, and you can grow, because the platform is future-ready, to what you need. So that came out quite handy in time of recession. Without being too vain, I would say that our competitive advantage is -- or gap with other offering in the market is very much going our way. The bigger you are, the more complicated you are. We find ourselves in a really, really good position to implement that electronic glue, that connectivity. I don't think it's because we're smarter. It's because we are fortunate enough to think about it 15 years ago and spent over $1 billion very carefully to build very robust solution that happens to be in demand in this type of market. I think the strategy that we took, not to be a solution provider, not to really try to sell the visits or sell our programs, but rather think about ourselves as an enabler where we accept whatever is going on, and our role is to bring it together rather than being the vendor is paying off in dividends. If you think about our buyers, these are CIOs. These are the C-suite invested in many things when we dialogue with them, whether it's existing or new clients, and our ability to say we're going to allow it to have a very engaging, very simple, singular environment that will bring all your investments together, I think resonates very well in this time.

That's great. I was thinking I'd ask about a couple of the metrics that you report. You report active providers, that's been growing nicely, but you have made a change recently in the way you calculate that. Maybe why is it important that, that metric continue to grow? Will it continue to grow? Will Converge make a difference on it? And maybe explain a little bit the change that you made in the way you calculate that?

Sure, A.J. I'll take that. So active providers, it really is one of our most important KPIs. I think of it as a metric that really speaks to the breadth and degree of utilization of our platform. So we've seen that growing well into the 20%-plus area on a year-over-year basis regularly here. And we expect that will continue to grow nicely, especially as we bring larger customers on and they get their providers on. So we did make a change, I would say, a refinement in how we calculate that. The -- and it really addresses the issue of duplication, which is -- in providers, which is prevalent in healthcare broadly. But as it relates to where we sit right now with multiple platforms, we have providers that can be representing several employers on -- multiple different providers that we have running and another one coming on now. So we have come up with a better methodology for eliminating those duplications, and it had a de minimis impact for our first and second quarter.

Okay. That's great. And another metric you've tracked is visits, obviously. And I think year-to-year, the visit number in aggregate was sort of flattish, but maybe that's just a function of coming out of the pandemic and how people were accessing the system in the midst of the pandemic. But it's also interesting, you report scheduled visits versus sort of just random visits that happened. Why is that an important metric as well to track specifically?

Prior to the pandemic, we were running about 30% of our visits were scheduled. So the lion's share of our visits were really on-demand urgent care-type visits, right? And there's still a lot of urgent care visits, but what we have now is 70% of our -- 70% to 75% of our visits are scheduled, which means that those types of visits are really part of the paradigm of care as opposed to just with regularly followed up visits, et cetera. So it's less just doc-in-a-box type stuff and much more intentional as part of the care paradigm.

Okay. Okay. And another dynamic, especially for someone that might be a little new, the Amwell story is the focus on subscription revenue and the fact that -- is that -- especially the high-margin subscription revenue grows at a faster rate than the overall business. That's a part of your long-term path to enhance profitability. Maybe just walk people through that and how you expect it to emerge over time?

That's a great question. And so as we think about our model, our subscription revenue is currently around 70% gross profit margin. That will go up meaningfully once we're consolidated on this new Converge platform. So that goes up another 10%. As that grows more rapidly -- oh! and the visit side of our business, which is another kind of 40% of our revenues, that's around a 25% gross margin business. So as we grow our subscription revenue at a rate that's higher than the rest of our business, our gross profit margin should increase from where they sit today in the low 40s to mid-50s and higher over the next few years. That's going to bring with it a lot of enhanced profitability and really drag us. That, plus a sunsetting of investment in the Converge platform, bring us to profitability we estimate in the 2025 time frame.

Okay. And you've got your AMG revenue, Amwell Medical Group. And you've got the per visit rate there. How is that going to change over time? And maybe talk for a minute about how that's a differentiator for the company?

The AMG business is very important part of our business, but when you think about where we were and kind of where we are and going, we, I think, historically had been a services business with a technology overlay. Today and going forward, we're very much a technology business that has some services. AMG is one of those services. We have multiple other services. It happens to be our biggest service, but it's really something that is, I think, going forward, going to be something that hangs off that platform. It's strategic to many of our customers, especially on the payer side. And it is a key differentiator for us in that market, they really do rely on that. But increasingly, we're really about subscription revenue, technology revenue and much higher growth in that segment than we'll see in the AMG business. We're not out pushing visits or try to generate visits. We're kind of a taker of that volume. We do -- on behalf of some of our clients, do marketing services programs for them if they want us to help them achieve some goals in terms of visit growth. But it's not something we spend our own [indiscernible]

Go ahead.

Let me just add 1 example. So AMG was necessary because it's one of the tools we use to realize our clients achieving their outcomes. Early on, it was very difficult to have a reliable urgent care service. That's why we started AMG. Today, the #1 challenge is really staffing digital first. So if you're a payer and you want to make sure that you control the choices that your members are making while providing a phenomenal member experience, you need clinician at that tier. It's very difficult to staff that around the clock with very good availability. So that's an example of a very important role AMG is providing today to really allow to -- for realizing digital first and virtual primary care as quickly as possible. Another point is to add to the urgent care, we add a ton of specialty services from behavioral health to dermatology to MSK and so on and so forth. Not everyone has all those disciplines available around the clock in every state nationally. We do. So we are allowing our customers, payers and providers to realize some business goals very early with a good combination of technology and clinical availability.

And I think, Bob, you mentioned that part of the path to probability stepping down the R&D as you finalize everything you're doing with Converge. Maybe just walk people through that over the next few years, I think from here to '25?

Yes. So we expect that as we bring the development of Converge to, I won't say a close, because we'll never finish enhancing it, but the heavy lift is really done at the end of this year that we will start scaling that down over the next -- over the course of the next few quarters. And there should be a meaningful step down between this year and next year. And then I would say going -- by the time we're in the third or the fourth quarter of next year, we'll be at a run rate that I would expect that we would be able to see not just year-over-year declines, which we'll see a big one, '22 to '23, but a lot of operating leverage on that line item and really progressing towards something like 25%, 30%, 35% of subscription revenue in terms of how much R&D we would be spending. So that's the target. And we'll get there, I think, over a 2- to 3-year period.

And one thing on -- in this market environment that we're in, that becomes very important is for people to make sure you've got sufficient liquidity to get to that path to profitability by 2025. And I think one thing that's been impressive to me is you're not just saying, okay, we're going to just scale into 2025 and not have a lot of cushion, but it seems like you have a pretty good cushion in your cash balances relative to your cash needs. But can you just spend a minute and just talk about that?

Absolutely. So we raised about $1 billion in the IPO. And as we look to getting to our profitability, we probably, at this point, got twice as much cash as we need to get there. So we have a lot of flexibility in terms of our timing to get to that point, but also strategically, as we think of ways that we may enhance the business inorganically. So we feel very good about where we sit. And in this market, as you know, that's a huge asset.

Yes. Yes. Well, we covered a lot there, but I really appreciate American Well being part of our conference this year. Ido and Bob, thanks so much for your participation, and with the -- you weathered it well with your issues with your voice, but that was great. Thanks so much.

Thank you. Thank you very much.

Thank you, A.J.