American Well Corporation (AMWL) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Craig Hettenbach. I cover the health tech provider space for Morgan Stanley. Very pleased to have Amwell with us so CEO and CFO here. Just before we get started, some important disclosures, you can find them at the Morgan Stanley website, www.morganstanley.com/researchdisclosures.

So Ido, I thought I'd kick it off with you. And if I think just how the company has evolved the last few years kind of growth through COVID coming out of it and how the business model is evolving, I thought it would be a good chance to kind of just a refresher in terms of the business, what are some of the core value and driver propositions for Amwell services that you provide?

Absolutely Craig. So in essence, our mission has not changed much. We are in the basis of enabling access to quality care that is technology driven. In other words, technology care enablement. Our core focus is something we continue to invest in, which is this experience of more and more people that are going online. We try to get them a reproducible experience that is phenomenal to help understand what their issue is and match them with the right clinical program. We have our own clinical programs in long list of areas, including urgent care, virtual primary care, behavioral health, like patient nutrition and many other things. And growing list of partners, third parties with other clinical programs. Essentially, by having one experience, we are creating a very efficient customer acquisition cost to the sponsors and customer experience that is a whole person based. And we are able to go back to sponsors and have one set of reporting as it relates to creating and documenting clinical and financial outcomes. And that's really the heart of what we do. We do have a [indiscernible] business anything, but I think that they all pale in comparison to that important focus.

Great. And if we touch on just kind of the core, the strategy shifting more towards software and subscription business kind of what that means to the overall kind of health of the business, margin profile, growth opportunity? I know it's a very big undertaking in terms of what you've done and kind of what you're looking to leverage from that as you go forward.

By creating strategic focus, we are also able to significantly improve our cost structure. And essentially, available position is technology-enabled care that is proving better financial and clinical outcomes. The software that we use, the platform that we developed is really the main differentiator that creates those outcomes assuming the care, good care is available through many modalities. So for customers that have access to care services, they only buy the software, a good example is the DHA, the U.S. military, their own physicians, and they only need the technology that we offer in order to get a better access and better financial and clinical outcomes, while, others like large payers, large employers really need a combination of the software and the clinical services to reach their goals. But our gross margin growingly represents the value of the technology innovation in technology-enabled care where the proportion of ratio between care providers and patients is growingly increasing by allowing a hybrid mix between more technology and less very precious and limited provided time.

Got it. And maybe if we can take that and just kind of get into just the competitive backdrop, telehealth more broadly, kind of as your business is involved, are you competing against some similar competitors in the past? Are there other companies. How do you view as you plan for kind of RFPs?

Sure. So telehealth evolved much in the past few years. It used to be a service that is an add-on to the main pathway of care. People continue to see the doctors. And from time to time, went online to get a prescription or other convenient care options. Growingly what we see is the technology-enabled care, which I think is a better name maybe for it, is the main pathway for care. People go online before they do anything else. And while there are a lot of vendors that offer specific programs in well-defined different therapeutic areas, there is an unmet need to create a whole person launching place where I get the phenomenal experience. It's highly personalized. It's all about me understanding my conditions and benefits, the financial reality and matches the app with the right clinical program with an ability to refer from 1 program to another and an ability to arm the different programs, the information that they need in order to avoid replicating it in the clinical intake that is fairly repetitive and error prone. We built an infrastructure that ties together those different clinical programs into really 1 cohesive platform. And as a result, the overall experience is much better and the outcomes that we're able to achieve are significantly improved versus stand-alone array of different programs. Not many people spend the last 5 years, spending many hundreds of millions of dollars building such infrastructure. We are likely to benefit from the COVID-related environment that allowed for raising a significant amount of capital and investing it in creating this holistic infrastructure that now can pull in a lot of vendors together to create a cohesive whole person experience. This offering resonates really well with very large customers, people like Elevance, the U.S. military, many of the Blue plans and many others that are growingly understand the value that we provide and in many ways, are trying to shy away from offering a high fragmented array of a program, but rather want to own a white label consistent singular experience. And that's why we believe Amwell is fairly unique. When you look at AI, and I'm sure you're going to ask about that, AI has an opportunity to greatly improve patient experience, to improve the quality and scalability of the different matches between different programs and very importantly the analytics that proves the outcomes that were generated by the different vendors. We believe there is enormous upside in the significant market share that we have for same-store growth in the next few years as it relates to such an offering.

Great. Can we touch on just the importance of partnerships, third-party ecosystem like you said, you have a number of different applications that kind of plug in to your system. How is that resonating with your partners and your end customers?

Healthcare is very much around diversity. People want different programs for different needs for different cohorts. And we embrace this diversity so instead of trying to go and offer a set of fixed programs that are trying to do better in all areas for all the people all the time, we created this unique open infrastructure that allows each payer, for example, to choose the programs that are right for them or to continue to use the programs that are right for them, but envelope them into 1 experience, 1 cohesive data structure and very efficient handover of data and services in this singular experience. And that worked quite well for us.

Great. I want to shift gears to kind of the DHA, which was a very important contract. And really also get behind the point to win things with the government and how rigorous that process is. So can you just discuss kind of how you are positioned to that in terms of what helped that and probably more importantly, what that means more broadly for the platform and opportunities beyond the DHA.

The government space is very unique. We are talking about a very large scale and a very long list of very clear requirements. It takes a lot of effort, a lot of time and a lot of investment to comply with the many requirements of the government and really understand that you need cohort, which is really different than many commercial cohorts. We are lucky enough to get chosen early on to go through this process and we learned a ton. Right now, our platform luckily is deployed around the globe for all the men and women in uniform in the U.S. military and their families. It's a great privilege. We are very grateful for that. And we went through this learning process. Our technology is implemented in the GovCloud and checks all different boxes that are required. And luckily enough, is already generating very good outcomes for this client. This kind of environment is very typical to many other government entities that could easily follow up following this initial investment that we made. So the next client in this environment is going to be much easier, we believe, a much faster to deploy than the original one. Although I'm proud to say that if it relates to the DHA, we are one of the few vendors to deliver on time and on budget quite quickly for this very, very large cohort.

Got it. And you did get a 1-year extension for this contract, although there were a couple of modules that are not included in that. Can you just maybe just give some background there in terms of where things stand and what that might look like going forward?

So after we delivered everything on time and in budget, and you know that many of the KPIs, if not all of them, were met or exceeded for this client, we were part of a much larger group, together with Leidos, Oracle and many others that had to extend the vehicle that was used in order to continue our agreement. All partners in this vehicle received an extension of 1 year and we are the same. I don't think it necessarily means anything good or bad about any participant. It's just a government's general decision that relates to negotiation dynamics. The programs that we implemented in addition to our platform that relates to certain services in behavioral health and automated programs were deployed successfully in 5 demonstrative sides, but did not expand into enterprise. And this year, although we're very proud of the results that we generated, the government chose not to expand those services to enterprise, I believe, driven by financial consideration, we believe that the fact that it was delayed once is not indicative of this to not be available long term. And we believe there is still a good chance that when budget will defined in a different climate, those very valuable services could be incorporated for these government customers and certainly for others as well.

Got it. And you mentioned it's a very different kind of go-to-market in process with the government versus commercial. How do you think about just kind of security, compliance, like what were some of the unique things that you maybe had to do for this business?

Well, we're talking about national security. We're talking about men and women in uniform, and combat and things of the nature. So anything you can imagine is still valid, information, privacy, cyber security, readiness, availability, performance, demand are extremely demanding that you can imagine. I can't even imagine more demanding customer. But we are pleased that we worked really hard and we're very proud of our team that we're able to meet those demands, not only once that we deploy, we are tested on this every day, all the time. And it's been quite a while, and the system Thank God is working well in production, very, very large scale. And I'm sure that if we need to expand and deploy additional similar environments, we'll be up to the task.

Got it. And as this business continues to ramp, what are some maybe KPIs and metrics that investors can kind of look at and say, you're getting the traction that you want to see...

So this specific customer is very careful about sharing information. Of course, we will never change that. But in general, I would suggest that government clients are really no different than commercial clients in the sense that they understand the value of technology-enabled care. They do that because it's a very efficient tool to improve access dramatically to create traction that at the end of day is improving clinical outcomes, it also creates significant savings. I can share that all our customers and the DHA is no exceptions are seeing very good results and KPIs as it relates to those metrics.

Got it. And then just beyond the DHA within the government more broadly, are there opportunities or things that you say that you've done this that you can maybe capitalize on? How do you think about that?

Absolutely. There are many organizations that are structured very similarly to the DHA that are -- have shared set of requirements that have very similar needs. Their technology environment is very similar, we believe that the barrier for entry into the government is enormously high. But once you're there and you're performing expanding it are real opportunities that we are definitely going to benefit from in the not-so-distant future.

Great. We can bring Mark into the discussion. I do want to talk about kind of the path to profitability because I know you guys have done a lot of work in terms of reducing cost. Can you just talk about -- give some background on that and just what's your visibility like? What are some milestones that you kind of hit to get the possibility?

Certainly. Craig, back in Q1 of 2024, the company stated that they would achieve breakeven at some point in 2026, and we're wedded to that mandate. The focus for the company has been to concentrate on that core area that Ido referenced, the payer, positioning both private and of course, government. When you think about the concentration of our clients today, over half of our business, is with 2 significant payers. And the remaining part of the business is where we think the greatest growth opportunity is. We need to resource for that. We're investing significantly in AI on the part of providing both front-end and back-end services to replace what we have or the cost structure for many years now. We have been an innovation shop for many years, but that innovation was at the cost of several hundreds of individuals who were with us for certainly half a decade or more. And when we started this year, we had over 1,000 employers, we're currently at about 650. We continue to see areas of opportunity in limiting that cost structure. And most importantly, growing the book of business at a far lower cost than having a far stronger ROI.

Got it. It sounds pretty clear in terms of the opportunity set where the growth is. How do you think more broadly about just the trade-offs in terms of the investments that you're making, the return you want to get? How does that all factor in.

I think technology and the -- now the opportunity to bring AI in the front end of the administrative side of not just onboarding and then engagement with particular members. It completely changes the calculus and gives us opportunities for ROI expansion that we had not previously seen. That resonates well with both prospects and existing clients. And we know certainly, moving forward, we don't have that same cost ratio for each variable dollar of revenue that comes on. So it's much more promising as a result of the opportunities that we have in bringing on this innovation and had we had to continue to go through cost-cutting measures that were necessary to reduce this cost base to where we needed to be at the end of next year.

Great. You touched on some of the third-party solutions. How important is that just from a margin mix or contribution margin? And how should we think about that as some of those potentially ramp.

Yes, it's one of the more significant contributors to our goal of breakeven. Those third-party programs are extremely important in both amplifying the need to bring on our platform into a new client. It makes us far more appealing to those clients when they can actively pursue a number of solutions through 1 vendor. And of course, our margin on that is a revenue share and a component of which generates margin profile that's very similar to SaaS software. So you're looking at 90-plus percent margins, and that helps us generally move towards that far greater contribution of software type revenues as compared to the pure AMG services.

Got it. And Ido, maybe if we take a step back, a lot of change in the industry for Amwell in terms of positioning this company getting -- for growth. How has the organization responded? How do you feel today in terms of the teams that you have in place? And how is the organization responding to all this change?

It's really interesting. Look, we went through so much all of us in digital health in the past few years. There was a time where people took a lot of risk and placed many bets. And that's good. And some of those bets paid out quickly and others would have taken much longer to pan out. The current environment is such that there is no ability to place many long-term debts. You need to choose. And that discipline actually is a blessing in many ways because when you get to make some hard decisions and focus on a very, very clear, well-defined mission, we also get a lot of clarity and enthusiasm by the team members. So we have a very clear role. We want to create the most phenomenal experience for consumers that we possibly can that are also patients. We want to match them with the best set of comprehensive clinical programs and help generate very significant savings, clinical and improved clinical outcomes and financial savings, improve it and documented for the different sponsors. That's it. That's all you want to do. That's much narrower than the conversation you and I had on a while ago where we had many more ancillary business that we deemphasized over time. I think that the entry of AI will present a super exciting opportunity for our companies, like many other AI companies in really realizing a mission in a very different way. Suffice to say that our smaller team is more excited than ever member, we see a little bright eyes. People get really, really excited around our road map. We have a very sophisticated and a meaningful client base. We bring to them very important KPIs in a large scale in a producible way every day. And we get to do that with a very modern platform that we invested a ton of money in time building. So overall, in many ways, I think that morale in the company and the excitement is as high as I can ever remember.

Great. Just building on AI, I know you have a new CTO from Amazon. When I think about just convergence happening between health care and technology and a lot of big tech companies getting into the field, what are some maybe insights he is bringing to Amwell? And what do you see in kind of his role in terms of what he's going to be kind of a performance-based.

Yes. Dan Zamansky is a wonderful placement in Amwell. He is EVP for product and technology. We also brought another very talented guy from Amazon to be our CTO, Rory. And there are quite a few others. We have people that are joining Amwell today from the best of AI health care in America. I know that sounds like somewhat of a strong statement, but it's still true. People really get excited about what AI can do in clinical field, which is a field that is very, very complicated, fairly risky in some ways, but we've been around for a long time, and we think we found a way to do it in a responsible way. Overall, those people are able to match well with a deep institutional knowledge around clinical in Amwell, but they bring innovative abilities related to AI to create a perfect hybrid between what technology can offer and safe care can offer to try to solve things that were not possible to solve only a while ago, like finding the way to really change cost in health care, changing cost of visits, changing the cost of the clinical programs. Those innovations will be apparent to everybody in the road map that you're going to see in the next 12 to 18 months. These are things that are coming down the pipe that all our clients and the general public will be able to see and witness and I don't think we were able to do it without the newcomers. And now with the newcomers, we're able to do it without the veterans of Amwell that are so familiar with all the challenges and risks associated with providing reliable, trustworthy care. The combo is fairly unique.

Got it. So there's a lot of excitement in terms of the efficiencies, and you can kind of run leaner. You mentioned from a clinical perspective, how about just roadblocks, right? Because when we think about health care and AI, are there still things that have to be kind of solved that kind of get this off the ground more broadly?

Absolutely. I don't want to make it sound easy or obvious or trivial. There are really serious challenges related to AI. AI has hallucinations. AI is not accurate. It's not always dependable many things that people think AI can do, AI cannot do. In health care is an era where there is 0 tolerance for any type of mistakes. So trying to understand the benefits of the tool, the places that they can reliably generate an outcome in the place that they cannot has been the focus of Amwell in the last few years. We believe we figured it out a safe and reliable way to do it very carefully, very responsibly, but still in a way that will create a very significant outcome in a place that we believe is the most important. I mean making care much more easy to access, making care much cheaper and much more effective is something that requires some transformative innovation that AI can deliver on.

Great. I want to turn the focus just to kind of some recent results on the back of your earnings, you talked about kind of Florida Blue plan, just some wins. What's really resonating with your -- the recent wins as well as prospective customers out there.

Absolutely. Sponsors understand the value of technology enabled care. It's very apparent to everybody that the right way for patients to go is to go online to a place that knows everything about them, to match them with what they need and make sure that we improve this offering again and again and again in order to provide the best return. So in many ways, we see that many payers today are really embarrassed by the number of -- sheer number of different clinical programs and what it takes to manage them. And when you think about it, each clinical program needs to acquire the consumer again and they need to prove the outcome in their therapeutic areas and someone sponsoring in the payer space, need to stitch all this information together and go back to the sponsor to prove an ROI. That's a very, very complicated task. We have a platform today that allows you to have 1 consistent experience that is very, very simple to all your different clinical programs and 1 set of the reporting, and that's really resonates. And that's fairly unique. And very few companies in our world are doing that today. We're not only doing it. We are going to -- as I mentioned earlier, we're going to do it in a highly improved way with some new technologies that I think will further distance our differentiation from the other actors in the market today.

Got it. And payers and health systems have their own set of kind of challenges that they're navigating to, how is that influencing kind of your go-to-market sales cycles, things like that? Like how is the macro backdrop today?

I think that people are incredibly sensitive today to ROI. If in the past, you could offer some bold ideas of visionary investments. I don't think the environment can tolerate that today. You need to come with a plan that has very well-defined time line to KPIs, delivery and ROI, return on investment. The fact that we are very trusted in improving asset in the market is extremely helpful. When there is a new blue plan that wants to buy Amwell today, they know that there are tens of other plans that have tried that before and it's delivering for them. So there's very little question marks about the way that we are going to perform. So the fact that we are offering new technology, but from someone that has been in the market for many years and deliver again and again and again, I think is a source of great differentiation and comfort to existing and new customers for Amwell. And I think that's important. I think that the fact that we are no longer emphasizing other bets that are less clear is also very, very helpful. It's easier to explain today the value proposition of Amwell to our customers, and it's even easier to grow and realize their expectations in a fairly expedited fashion.

Got it. If we think longer term, so we talked about kind of the path to breakeven, which is very important, and you guys are progressing to that. How should investors think about the opportunity set, whether it's size of the market or potential growth, margins on a longer-term basis?

So we are now experiencing a revolution in many ways where technology-enabled care is becoming more and more available to everyone. More and more people are going to go online to seek health care before they do anything else. So the original method of health care is really being replaced by technology-enabled care for a lot of good reasons. When we look at the size of the population that has access to Amwell, we're talking about 80 million to 90 million people. That's a lot of Americans. And only a fraction of them are benefiting from the many benefits of going online and getting technology-enabled care. The growth of Amwell is first and foremost, going to be through same-store growth. More and more people in our payer customers are going to go online to seek care and our ability to offer them more and more services is going to grow exponentially over the next few years. Their experience is going to be dramatically improved. And the data that we can provide the sponsors for the entire orchestration is going to be better and better. So they are going to develop a healthier appetite to invest in more and more engagement and enablement and coverage of our services. The fact that this is a fairly close to you, it means that the success we're having with existing customers is not going to be a surprise to newcomers and you're going to see more logos, both in government and in commercial space. I don't think we need to do anything else than our core focus, which is a phenomenal experience, very good matching to long list and growing list of clinical programs with very clear ROI that is demonstrable and documented. And there is plenty of growth if you do that and do that well over the next few decades in my opinion.

Got it. And not to get ahead of ourselves, but getting back again to kind of breakeven and how important that milestone is. It sounds like the message is very clear in terms of your strategy, what you're looking to execute on an environment where you become profitable, how do you think about capital allocation? Or is there organic inorganic investments that could further your position in the marketplace?

We landed in a very, very clear place. We know exactly who we are, we're on exactly what we want to do. And we -- as I mentioned earlier, we could see a very clear path for growth doing what we're doing. So when we get more resources as we become more and more profitable, we're going to reinvest those resources in exactly the same thing. If we have today a very simple way that allows our parents to go online and navigate and get what they need, if there is a way to really help our clients generate better savings and better clinical outcomes, we're going to invest again and again in doing exactly the same thing organically. Of course, if we stumble across people that can help us do that, but the same goal and the same mission, we may acquire them, but we are not going to do anything else, but what I just said.

Understood. And just going back to the organization permit and bringing executives in from companies like Amazon, what are some of the things? It sounds like maybe it's a mission, but what are the other things attracting them to Amwell in terms of where you are at this stage in the company what the opportunity looks like.

We may be small, but we want to change the world. We really have an appetite to the democratize health care. The mission of Amwell is the reason why people leave jobs that are far bigger and in an area that is so hot, like AI and others and join Amwell because they understand that with their work they can help millions of Americans and maybe people even outside America, get the care they need in a fraction of the time, the fraction of the cost and get better. And that is truly difficult to match. And we can really do that. And those very serious people, they join us -- and the wonderful people that have been with us for 2 decades are united by that vision and ready to do whatever it takes to help realize it.

Great. Well, as you kind of wrap down here coming up in the last minute, what are some things maybe investors should watch for the next 6 to 12 months, whether it's milestones or things to kind of keep an eye on to see the progress of how the strategy is working out?

Well, we are laser focused. It's not hard to follow what we do. You can see that we are making some serious step in focusing the company and dealing with our cost structure. You are going to see some serious innovation that will result in further more and better, better delivery and outcomes for our customers, existing and new ones. And you don't need to wait long to do that. We have in the next 12 to 18 months, a lot of change that people are already seeing in our world is only going to get clearer and clearer is we seek our goals that we outlined earlier.

Great. I think we'll wrap it there. So Ido, Mark thank you so much of your time and sharing your insights with us.

Thank you, Craig. Thank you for having us.

Appreciate it.