American Well Corporation (AMWL) Earnings Call Transcript & Summary

All right. Thank you for joining us here today. My name is John with Goldman Sachs Healthcare Equity Research. Joining us from Amwell we have CEO, Dr. Ido Schoenberg, and CFO, Bob Shepardson. Ido and Bob, thank you very much for being with us here today.

Pleasure to be here, John. Thank you.

So just to kick us off, for those who may not be familiar with Amwell, please begin by giving us a quick background on your company, its mission and your role in the health care technology landscape?

Absolutely, John. So for almost 2 decades, our mission is to help customers enable hybrid care delivery, resulting in efficient and effective care. Hybrid care means digital first access to coordinated and integrated in person, virtual and automated care. It means care anywhere, anytime in a way that is fully connected across the continuum. We empower and connect payers, providers, innovators and consumers. We provide them with the technology infrastructure and services to realize their hybrid care needs and ambition. We serve a sizable customer footprint over 2,000 hospitals in payers that cover over 100 million lives. Efficient and effective hybrid care requires a common platform between all ecosystem players and that is uniquely possible with Converge, the same platform is used by both payers and providers, and this allows for many benefits, which I'm sure we're going to cover later today.

Perfect. Thank you very much. And if you would, please talk to us briefly about the evolution of Amwell from your legacy business as more of an urgent care provider to a technology enablement platform and then let's dive right into Converge.

Sure. So essentially, we saw a lot of change in the past few years. pre-COVID, we will remember telehealth was mostly focused on urgent care is an affordable and convenient alternative to trusted care and informed relationships. In COVID, the providers and patients were forced to connect digitally. As a result, psychological barriers to adoptions were removed, proof points of the value of hybrid care accumulated and digital care became legitimate and a covered benefit. Post-COVID, force demand for telehealth evaporated as patients prefer to connect often in person with their trusted providers. The focus move to hybrid care, enveloping in-person care with technology to make it much more accessible reproducible and improved. Payers promote digital first to offer members choice and routing them effectively. Digital first emerge also is an important way to increase member and group loyalty. Providers promote hybrid care to improve provider and patient retention, improve efficiency and grow revenues in nontraditional ways. It was apparent to us early in COVID that these changes are happening. We placed a big bet and decided to re-platform and build Converge. It was not simple or easy decision but I couldn't be happier today that we made this decision. Converge fits very well with the needs of the market today, and it's fully future ready.

Excellent moving to Converge, as your flagship digital enablement platform, if you could talk to us about how it arrived at its current state and in your mission of this digital-first care delivery you really become a broker of sorts to bring a side or brings together different size of the care equation.

Sure. Converge features super modern architecture and is based on almost 2 decades of institutional knowledge and client feedback. You are 100% correct, John, that rules-based brokering between patients and the service and information they need is a key value driver of Converge. In many ways, the platform is logistically redistribution -- redistributing care to benefit all payers. At its core, Converge is designed to support multimodal hybrid care delivery, fully integrating in-person, virtual and automated care across all types of points of care in the full care continuum. The platform connects and matches the cohort of patients with trusted providers, data and services that are appropriate for them based on choice, clinical, regulatory, operational and financial consideration. A single code base is supporting all types of ecosystem players, including payers and providers. This single platform also allows any operator of Converge to exchange information and services with any other operator. There are many benefits to this exchange, but key is the ability of payers to engage with providers to enable value-based care. The platform is designed to integrate with existing clients and third parties digital assets to help create a unified, simple and scalable experience. It creates virtual integration that is very helpful for our clients as they face fragmentation driven by a growing number of vendors working in parallel to enable hybrid care.

Excellent. And just expanding on that point, if you could talk to us a little bit more about your emphasis on not directly competing with payers and providers? And how has that contributed to Amwell's growth story?

Absolutely. Our mission is to empower and enable our customers to offer hybrid care, resulting in a more effective and efficient delivery. We think we are unique in taking this approach. Our clinical services are there to complement our technology and accelerate ROI for our customers not to compete with theirs. Our platform is designed to integrate with our client digital assets and not replace them. In short, our offering is focused on growing our client business and never overlaps with it. We never see a platform as a vehicle to sell competing services with our clients. As the market becomes more competitive, our focused mission allows us to work with a very large part of the ecosystems. Clients rely on us to help realize their hybrid care ambitions without being worried about potential conflicts. As a result, it is much easier for our customers to accept us as their partners. Our interests are fully aligned to help them be more successful.

Great. And one of the points you consistently seem to emphasize is the modularity of Converge. I believe you mentioned there was something along lines of 60 different components. How you think about customizing solutions for clients, which address a specific need versus creating solutions, which will address a larger group of participants. In other words, how are you going about scaling the more specialized aspect of the platform being mindful of the trade-off between revenue and R&D? And what do the economics look like for very sophisticated strategic clients?

Yes. That's a great question, John. we built Converge to be a one-stop shop hybrid care enablement platform. It now features 72 different components, which are really unique capabilities. With Converge components, we can enable a growing number of solutions, which are addressing various business goals for our customers. This modular product architecture allows us to offer our client solutions they choose to buy today with a peace of mind that they can expand very easily when they are ready. It also allows us to sell to different client sizes with different needs and appetite without affecting the integrity of our product. It allows us to shine and offer most unique and complete value to larger clients that appreciate our integrated comprehensiveness. Some very large strategics often want to go even beyond the food offering with custom development work to help them further differentiate. We execute this development while retaining our IP. These [ SoWs ] come with reasonable margin and consider professional services and not part of the R&D budget.

Excellent. And now moving to migrations, how are they going -- what's new on the migration front with '22 more being the year of converge platform development. You stated your '23 priorities are to migrate the balance of your clients to Converge, focusing on your remaining provider clients and deployments for payer clients have also already begun. I understand payer clients are more focused in '24, but what's the feedback on the provider side?

That's right, John. We've been very focused on migrations, 36% of our visits in the first quarter took place on the platform, and that's continuing to move up since we're laser-focused on getting our provider clients migrated for the most part, looking at that base this year. And the back half of the year also really beginning the process in earnest with our payers, and we expect to get a lot of our larger payers done this year, but won't see their visits present really until next year in '24. So the focus is definitely on providers this year increasingly payers in the back half and we'll see the provider visits come on, but the payer visits next year.

Okay. Excellent. And the feedback from these health system clients on the platform, what are they reporting to you on the macro front? Are there any objections you hear from these clients in moving to Converge. And generally, how do you balance the speed of conversion while still meeting the clients' needs? How do you meet clients where they currently are?

So as Bob mentioned, the feedback from migrated client is excellent. They love the new user experience, simplicity, speed, scalability, modularity and reliability. Health systems are struggling with tighter budgets and shortages in staff. These likely do not influence their decision to migrate, but that's the influence timeline. We address that by making migrations as easy and simple on their end as much as humanly possible. Also a growing value of proof points from other clients is helping influence priority of client migrations. We never attempt to compromise client needs to accelerate migrations, the confidence and trust of our clients is our most precious asset.

Great. And for these health care clients, I think you've mentioned them being a heavier lift. What are they looking for in digital care delivery? And how is Amwell is addressing those needs?

Sure. So payers focus on enabling digital first and VPC services to their customers. The digital strategy has moved to the front line as evidenced by the public payers earning calls. These digital first is a critical tool to improve member experience, control utilization and improve provider engagement. Converge is built to enable the digital ambition. Our large provider penetrants is also available to payers since the payer converged platform is able to connect and integrate with a growing number of provider converged platforms.

And let's talk about churn. What have you seen during the Converge migration? I think for the most part, they have affected your smaller customers. What are you seeing with some of the midsized customers?

You're right on that, John. We expected churn when we embarked on this road of re-platforming. And we saw -- we have seen churn concentrated primarily in the low end, difficult to hang on to the commodity end of the market, especially with timing uncertain of when Converge would be available and how competitive that part of the market has become. We have fortunately held on to our strategics and our larger customers. And notably, our largest customer, Elevance, just resigned announced that they're going to resign in the fourth quarter signed in January. And so that's all predicated on them migrating to Converge. So we feel good about where we are from a retention perspective, it's in line with our expectations and increasingly, with Converge -- now commercial and in operation. we feel like we're in a very good position to go back and win back a lot of these customers that have made other decisions.

And why do you think specifically you've been so successful in retaining your strategic clients. Previously, you've quoted up to 100% retention. What do you think is behind that?

So we are very proud to be the backdrop to CVS new hybrid care platform. The system is live and in production. Our relationship with CVS is excellent, and we look forward to further expanding our activity. Our partnership with Elevance is precious and dates over a decade. We are thrilled by their decision to renew their multiyear agreement with us and see it as an important vote of confidence in Converge and in Amwell. Larger health organizations are affected most by fragmentation and really transform with integrating connecting platform. Converge was built to deal with a huge complexity of these large clients and also works well with a large array of existing digital assets. I know they appreciate it. You are right to note that we are seeing some really exciting outcomes in client ROI studies. These are probably our best marketing tools. There are quite a few examples, I'll just give a few Prisma, for example, that was able to save $4 million just by activating the annual ED discharge program. A horizon was able to reduce the wait time for psychiatric services from 5 days to 1. NHS was able to change the ratio between therapists and members and patients 6x over. You can also suggest that the cost was reduced by 85%, and the clinical result is equivalent or better even with those changes in efficiency. We continue to build on the use cases. Recently launched a new webinar that is available on a regular basis on our website that I really recommend the viewers and the audience to visit. There is a lot coming down later this year as it relates to really interesting proof points and case studies of newly deployed Converge platforms.

Great. And for the same larger customers, have any of them attempted to build out the solutions themselves. And if so, what is their feedback?

So they have, but we feel that we are unique. No one else does all what we do, combining tech, services, clinical knowledge, it's a big lift, and it's a very big effort. While there are point solution competitors like video visit companies, there is no single one-stop shop modular yet comprehensive infrastructure like Converge. We've heard organizations try to do that themselves. We feel it's validating that our approach is the right one, and we think that no one else can offer what we do.

Excellent. And now looking at KPIs, Bob, you mentioned the percentage of visits on Converge is up to 36% in 1Q from, I believe, 28% in 4Q how might that not always be the best KPI when you're considering your success and migrations and where do you see it at '23 year-end?

You're right. It's a good but not perfect measure of our progress. We also look at monitoring a number of active providers and also look closely at quality metrics. Things like system uptime, sums up reviews of experience from providers double tickets. And across the board, there is no comparison between the legacy platforms and what Converge is putting up now. On migrations, as I said, we expect to make good progress with payers this year but we won't see their visits come on until next year in the -- during the new enrollment season is when we expect to see those. So while the implementations and the migrations will be happening in earnest, it's not like the provider market where you see them turn up initially on pilots and then throttle up over time. This will be a bit delayed relative to when the migrations are done there. So it is kind of -- especially as we've been focused on the provider market, it's been a very good indicator of how the migrations are going, but not perfect as we bring on the payers.

Great. And now with the majority of Converge development complete, how are you equipping your sales teams for expansion with current clients and new logo wins? And if you could talk to us a bit about your evidence-based solutions-oriented selling approach?

Very important question, John, and thank you for asking it. Converge is 1 product, highly strategic, and this sale requires transformation of our sales teams, one that is underway. We sell the way our customers want to buy, solving today's pain points ready for the future. The sales process is now consultative. Every customer has different challenges and priorities, and our solution is designed to easily adapt to each client's needs. Our client-facing team is focused on understanding client needs and goals. It then maps the appropriate solutions for each client in the related components. Our sales team then needs to explain the process required by us and our clients to realize each client's business goals. This requires deep knowledge and skills, which we armed our teams with.

Excellent. Thank you. And given any new client would purchase Converge, the legacy system is no longer available to them. At what point do you sense that the legacy platform to expedite this migration process. And I believe recently, you mentioned as late as 2024?

Yes. We're not going to use that as a stick for our clients, unless we really have to. I think -- and we'll be making those ROI decisions later in the process. But as we've talked about, we've made -- we're making good progress with migrations. And we're driving to the end of '24 as kind of a target to sunset the legacy platforms, cost benefit at that point will be relevant, I think. So look, we think most of our clients, and we certainly haven't heard from any clients that they don't see the benefit in migrating. We don't control 100% of the timing of that, but we certainly see the intent, and it's consistent with how we're thinking about it. There's a lot of benefits, obviously, to sunsetting from a cost savings perspective. And the bulk of our cost savings, though are layering in now through the R&D line items and also driving sales efficiencies. But that benefit is one that will really influence, I think, our gross margins and will provide, I think, a nice tailwind from that perspective in 2025.

Excellent. And just moving to modules and products, are there any that are resonating particularly well with your clients -- I believe you mentioned your initiative to drive adoption of your automated care programs, what's going on in the behavioral health front? And if you could talk to us a little bit about your partnership with Dario?

So John, the concept of a single comprehensive modular platform is resonating well with our clients. It's less about one solution versus the other. Both payers and providers appreciate simple, fast, scalable, reliable platform experience.Payers are also focused on digital-first and VPC solutions. Both providers and payers appreciate the efficiency and impact of automated care programs, especially when integrated with virtual and in-person care options. In automation, there is indeed great interest in AI and special focus on viable health programs. All these more than justify our M&A of Conversa, SilverCloud and [indiscernible], which are now part of Converge. Dario, which has some great automated programs demonstrates the value of our investment in easy onboarding of innovators that we internally fund the call the App Store architecture of Converge.

Great. And now just moving to financials, Bob, your '22 revenue came in ahead of consensus as did your adjusted EBITDA. But I think the '23 guidance came in a little bit below what the street expecting. Now 1Q '23, you said the results were in line with your own expectations. Now that we're almost through with 2Q, how has your outlook changed on '23, if at all? And are you still confident in your initial '23 guidance?

So we gave the initial guidance in February, which incorporated some conservative thinking about revenues and how that will progress through this year of transition for us. We saw platform-related churn create headwinds and the macro backdrop as well, especially on the health system side as key inputs into our forecast. Also, from a visit perspective, last year, we kind of had the benefit of COVID and a very strong flu season. And we didn't want to make a similar assumption that for this year. So that was all kind of what went into our guidance in February, and we reiterated that at the end of -- on our first quarter call. Without a product to sell last year, we need to rebuild sales momentum this year, which will drive revenues next year just given the implementation time lines. It's a huge strategic initiative for us this year along with the migrations that we've talked about. So I'm pleased with how we're executing on this and hopeful that as the year progresses, we'll continue to put the pieces in place to return to growth on the top line next year.

All right. Excellent. And then subscription revenue was down quarter-over-quarter in your first quarter as you expected, given your '22 focus on Converge development, what's new on the bookings reacceleration front? And do you expect subscription softness to continue?

Well, yes. And it's really all part and parcel of this re-platforming impact with the limited ability to upsell, given the platform wasn't available and new logos kind of want to see how the platform is going to perform. So that's all influencing the revenue growth this year. And many of the features of Converge really just launched commercially with CVS in January. So it's early days, I would say, in terms of just the sales force really having the tools to go out and change the game a little bit here. Ido discussed our relaunch of the sales and marketing approach. That takes time, but we're very happy with the progress we've seen. But again, implementation time lines mean limited opportunity for much in-year revenue growth and it's really more of a 2024 impact, though we do expect to see some in the back half of the year.

Excellent. And for visit revenue, what are you seeing there? Broadly, how does AMG fit into your plans as the subscription business continues to grow in the past, contribution from subscription visit has been relatively similar.

Yes, we guided just to focus on the very near term for -- and I talked about this, but guided to flattish on the visit side, just given the setup from last year. But AMG -- I mean we talk a lot about Converge and we talk a lot about just the focus on the software piece of the business. AMG though is a very strategic asset, especially when you think about the payer market. Not everybody, not every payer out there has a roster of provider and clinician assets. And so our ability to help them not just on the urgent care side, but when they think about rolling out virtual primary care and products like that, relying on us to either help supplement what they have or drive it from an asset perspective is really, I think, highlights the criticality of that asset.

Okay. Now moving to Carepoints and services. It seems to be lumpier, but also margin accretive. Talk to us about that segment. Also, you referred to it as being a bit of a leading indicator for future business and illustrative of your partnerships. I imagine that's more qualitative and quantitative in nature for correlation?

Yes. And especially as we think about taking R&D down over time, the maintaining kind of the cutting-edge nature of the -- of what we offer on Converge for our clients increasingly is going to be driven by what they want to see happen from a custom perspective, and they're paying for that. So we saw a lot of activity from that perspective in the fourth quarter of last year with custom development and implementation and we'll see a decent amount of that this year as well. And that really -- if they are having us do that type of work for them. It usually brings with it more traction, deeper, broader integration across their assets and/or more solutions that they would like to bring on to further differentiate their offering. So we see it as, I think, a very positive forward-looking service that we provide and about -- and we think it makes us obviously much more sticky in how they're going to market.

Great. And then moving to margins. You've previously said that your gross margin profile of subscription and visit can get to 70% to 75% and then 25%, respectively, what are those -- is that still a case? And also, what time line are you seeing for achieving north of 50% overall gross margins? Could you go higher than 50%?

The growth and mix shift dynamic is really a critical aspect of our model. We have the platform now. It's unique, and we're creating a 2-sided market in addition to today's existing use cases. In the high end of the market, we believe, has voted that this really is a unique asset and will really help to drive top line there. We're reorienting our sales and marketing efforts around a repeatable modular platform-based solution sale. This is going to gain traction in the coming quarters, and we believe ultimately drive our margins through 50%.

Great. And for R&D costs, you've spoken about it. Please remind us what you have mentioned could be the 4Q '23 exit rate?

Yes. As I said, the process has started for that to come off. We're down 14%, first quarter relative to fourth quarter, and we expect the fourth quarter to the fourth quarter of last year to be down mid-20s.

Great. And then given this consultative selling model, extremely interesting, how do you see yourself creating operational efficiencies on that front? I imagine it would actually be slightly more labor intensive. And then what happens to margin profile when you flip the switch and sunset the legacy platforms?

I think it's not really -- it's not more labor-intensive. You could argue you need fewer bodies, just a different approach and different training, which we've -- we're well underway on in terms of that approach. We also think that this model has the potential on a consultative basis to drive higher revenue per sale. And so getting a higher -- a lower per dollar cost of that sale is very much in the plan. So we definitely see the ability to at least leverage that line item as we go forward and maybe even bring it down over time.

Excellent. And just a few minutes left. What this is ultimately leading to is your EBITDA margin profile? How do you feel about your previously established 2025 path to profitability? You've made a great point that your $500 million in cash would allow you to weather any delays. How do you feel about it? And how do you think about growing the business versus hitting these nearer-term financial targets?

So just to remind everybody, the previous messaging was a framework and not a forecast that we presented in early '22. But with that, with Converge done at this point, we have so much more flexibility in our cost structure that I think we have a -- we can really put a finer point on where we see and toggling and linking our cost base to what's going on the revenue side. Our goal is still profitability late '25, but are absolutely fine if that takes a little bit longer, given that cash position. In our cash position, it allows us to really do the right thing for the business in balancing that growth profitability algorithm.

Excellent. And then moving to capital priorities in M&A. You've had successful acquisitions and integrations of both SilverCloud and Conversa, how are you thinking about M&A in the current environment? I believe you mentioned you do not really see an unmet need -- but if you were to, it would likely be a technology asset and what size of acquisitions would you consider if you were looking to acquire?

As we look at where we are with Converge right now, there's nothing really missing -- and so -- we have a very active corporate development effort. We know everything that's going on in the market and the types of assets that are out there. But we really are looking to a partnering model and an enablement model at this point, especially given or just what the market looks like in terms of our currency and our desire to really preserve that cash for a rainy day. So we don't really see anything transformative certainly from an M&A perspective, given where we are from a capabilities perspective, there could be small extensions or tuck-ins that might make sense over time, but we don't expect to see anything near term.

Great. Thank you very much. We're just about out of time. In closing, this question is for both of you. What most excites you for the remainder of '23? And what message would you like to leave with investors?

John, great way to end a good set of really good questions. So many things excite us, but 4 come to mine, especially one continuing the migrations, creating more happy Converge customers and collecting stories of success, ROI benefits and sharing those stories with the market. Two, our sales transformation, both Bob and I discussed, taking a seat around the table to solve our industry's biggest problems and guide our clients to evolve their digital hybrid care aspirations. Three, seeing Amwell continue to evolve as a company. Our hires have been amazing. We are very proud of who is choosing to join our mission. And last, exiting the year with everything we need to accelerate profitable growth.

And Bob?

I think Ido covered it very well.

All right. Thank you very much, Ido and Bob for joining us here today. We really appreciate it. And that's all, everyone. Thank you very much.

Thank you.