American Well Corporation (NYSE:AMWL) Q1 2024 Earnings Call Transcript

American Well Corporation (NYSE:AMWL) Q1 2024 Earnings Call Transcript May 5, 2024

American Well Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amwell Q1 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Sue Dooley, Head of Investor Relations with Amwell. You may begin.

Sue Dooley: Hello, everyone. Welcome to Amwell’s conference call to discuss our first fiscal quarter of 2024. This is Sue Dooley of Amwell Investor Relations. And joining me today are Amwell’s Chairman and CEO, Dr. Ido Schoenberg; and Bob Shepardson, our CFO. Earlier today, we distributed a press release detailing our announcement. Our earnings release is posted on our website at investors.amwell.com and is also available through normal news sources. This conference call is being webcast live on the IR page of our website where a replay will be archived. Before we begin our prepared remarks, I’d like to take this opportunity to remind you that during the course of the call, we will make forward-looking statements regarding projected operating results and anticipated market opportunities.

This forward-looking information is subject to the risks and uncertainties described in our filings with the SEC, and actual results or events may differ materially. Except as required by law, we undertake no obligation to update or revise these forward-looking statements. On this call, we’ll refer to both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. With that, I would like to turn the call over to Ido.

Ido Schoenberg: Thank you, Sue, and hello, everyone. I’m pleased to report that Q1 was a busy quarter for our company, one that provided a strong start for an important year for us. As a reminder, on our last call, we shared our guidance for a step function in our growth that will help us achieve our profitability goal in 2026. Before I share some highlights on our first quarter, I would like to open with a few general comments. It is now clear that the need for digital care enablement is significant. It is also clear that Converge is performing well and powers sophisticated solutions across diversified clients on a large scale. And finally, it is evident that new large customers are recognizing the value of our platform as reflected by the size and revenue mix of our recent wins.

Importantly, as we deploy our offering in the government sector, modernizing the military health system, we also expand into a new sizable market. In addition, we believe that implementing our platform in the demanding government environment is demonstrating important proof points that are also relevant in our existing commercial markets. Those include scale, versatility and cybersecurity capabilities that will shine a spotlight on our market differentiation across all our segments. During the past three months, we have taken major steps to adapt and transform our organization that will result in a greatly reduced cost structure as reflected in our forward guidance. In addition, we have good visibility into strong top line growth in 2025, coupled with greatly improved margins.

The guidance we gave on our last call described a 30% jump in our 2025 top line, reach with subscription software that will drive gross margin expansion to over 50%. We believe this is a clear indication of the completion of our re-platforming investment period. We believe our technology offering is unique and will continue to drive favorable high-margin software revenue mix, and our strong balance sheet fuels us well beyond our needs to achieve profitability. We are proud of our many clients, big and small, that are now committed to and utilizing Converge as their platform. Converge connects their health care services with millions of health care consumers. It drives efficiencies and fuels new revenue opportunities for them on a foundation of very high user satisfaction scores and NPS ratings.

The market for digital health is just starting, and we are well positioned to benefit. What we do is complicated. The value to patients, providers and payers is significant, and we believe our deep integrations and vast deployments from long-term bonds with health organizations make up a big part of the U.S. ecosystem. We are proud of what we accomplished in the past three years and believe it is beginning to pay off. And now I would like to review some highlights from Q1. First, we are delivering for our clients. In addition to the successful go-lives and migrations we completed this quarter for several clients, we are steadily completing critical milestones as we deploy our solution for the military health system, working alongside the latest partnership for Defense Health.

Following our successful rollout of our digital behavioral health solution in Q1, we are now targeting the next capability offering go-live for Q3. Our efforts are on schedule, and we look forward to supporting the MHS in their full enterprise deployment of our solution scheduled for Q4. Interest in the work we’re doing together with the DHA is growing. Early in Q1, in its health.mil website, the DHA also announced its launch of our digital behavioral health solutions at the beginning of its journey. Also recently, an article for Modern Healthcare described the DHA’s commitment to modernization with our offering at its core. Second, we solidified important initiatives in our growth organization aimed at reaccelerating our bookings and increasing our mix of subscription software revenue.

Our growth org is embracing the changes we have put in place and tonight, I will share an example of our booking success. Third, we continue to drive for efficiency. We are optimizing our company by instituting a cost structure that provides a baseline for meaningful profit expansion as our growth scales. In a very active Q1, we successfully migrated a large portion of our visit volume onto our Converge platform via some of the most strategic payer migrations, including previously announced Elevance and Highmark. Visits on Converge were nearly 70% in Q1, meaningfully higher than 54% in Q4. Our platform is scaling and performing well and client feedback remains strong, with funds operating consistently well over 90%. Now, I would like to provide some color around the successful Q1 client expansion, demonstrating the growth potential within our existing client base.

We have a sizable expansion with an existing East Coast Blue payer client that will deploy several of our automated programs to drive engagement, reduce costs and compete for members in a crowded regional market for health insurance. Leveraging our programs, this payer intends to identify high-risk members and proactively encourage them to engage with high-value care programs like diabetes management. We also had a good quarter for client renewals, including Highmark, Intermountain, El Camino Health, Penn State and Cleveland Clinic. Concluding my discussions on our growth initiatives, we think we have the right team structure in place, and engagement with existing and prospective clients is high. We’ve completed detailed client reviews and creating rigorous account plans with metrics and compensation plans that emphasize a high-value ROI selling approach and a focus on selling subscription software.

Our new working team’s embracing the robust enterprise selling motion, which we believe will accelerate our growth, fueled by demand for our hybrid care expertise and a differentiated approach, enabling hybrid care delivery across the health care landscape. Based on these achievements, we continue into 2024 with high conviction regarding our guidance for meaningful growth next year and our plan to achieve profitability in 2026. With that, I would like to turn the call over to Bob to review our financials, some key metrics and our guidance. Bob?

Robert Shepardson: Thanks, Ido, and good evening to everybody on the call. We ended the first quarter in a position of continued strong visibility into our future growth and our path to adjusted EBITDA breakeven. Tonight, I will walk you through a few operating metrics and financial results from the first quarter, then I will review our guidance for 2024 as well as our expectations for 2025 and 2026. To begin, total visits were approximately 1.67 million in the first quarter, a small decline versus 1.7 million last year. Visit volume this quarter was negatively impacted by two onetime events: first, the Change Healthcare security breach; and second, a temporary disruption associated with our largest client migrations to Converge to date.

We resolved those issues before quarter end. Scheduled visits represented 63% of total, continuing to highlight the evolution of our company from providing virtual urgent care to a platform provider enabling hybrid care. We continue to make good progress migrating our clients to Converge. As we announced in February, we successfully migrated some of our largest payer clients, and we saw volume from them ramp this quarter. With their volume now migrated, the percentage of visits on Converge is materially higher than the 52% from last quarter and, from 1Q, was over 68%. Turning to our Q1 financials. Total revenue was $59.5 million for the quarter, down $4.5 million or 7% from a year ago. Approximately $4 million of the decline in revenue versus last year was subscription related driven primarily by legacy platform declines, with the balance driven by lower visit revenue offset by higher services and Carepoints revenue.

Subscription revenue declined 9% from Q4 and was $24.9 million in Q1. We believe the first quarter was our a low point for the year for subscription. We believe that subscription revenue will increase each quarter this year with contracted customer go-lives, the full benefit of which we will see in the fourth quarter from a run rate perspective. We continue to expect our subscription revenue for 2024 to be approximately flat to 2023. AMG visit revenue trended 4% lower than last year and was $31 million in Q1. AMG visits were 6% lower this quarter versus a year ago due in part to the onetime dynamics I just mentioned. Average revenue per visit was slightly higher this quarter than last year at $77 driven by a mix shift within AMG away from on-demand urgent care visits.

Our AMG business continues to be strategically important to client expansions and new client wins. Our services and Carepoints revenue was $3.6 million for the quarter, a decline of $7.7 million from last quarter driven primarily by the timing of professional services and marketing. These revenues are uneven from quarter-to-quarter due to customer buying patterns for marketing services programs and for Carepoints as well as the professional services milestones that precede deployments. We anticipate that our services and Carepoints revenue will represent approximately 10% of our total revenue for 2024, two-third of which will be recognized in the second half of the year, driven primarily by go-lives of contracted deployments. Turning to profitability.

Our fourth quarter gross profit margin was 31%, a decline of approximately 300 basis points from last quarter. We view this decline as temporary, and it was largely due to lower subscription software and services revenue combined with onetime costs related to the very large payer migrations we completed this quarter. For the year, we expect our gross margin to approximate the levels we saw in 2023 and expand meaningfully in future years as our mix of subscription software increases. We are tracking well on our path to normalizing R&D spending. GAAP R&D expense was flat to last quarter and was 7% higher after adjusting for $3 million of software development capitalization associated with our government work. Inclusive of this spend, software cap adjusted R&D spend is 10% lower than a year ago.

We continue to expect our total R&D spend to decline at least mid-teens percent this year versus 2023. Sales and marketing expense was $4 million higher than 4Q 2023 driven by severance and other costs associated with our growth transformation. We also had higher compensation accrual compared to last quarter, which was offset by lower salary expense due to our head count reduction. Overall, we expect GAAP sales and marketing costs to be level year-over-year, inclusive of onetime costs. G&A expense was $8 million higher versus last quarter driven primarily by higher compensation accruals plus higher stock-based compensation expense due to the partial vesting of 2024 grants. We expect our quarterly run rate for stock-based comp for the remainder of 2024 to be below the level we achieved in the fourth quarter of last year.

Adding it all together, adjusted EBITDA for the quarter was negative $45.7 million versus negative $44.6 million last year. Our gross profit contribution is lower by $7 million driven by lower subscription software and onetime migration expenses, offset by lower R&D. Transitioning to the balance sheet. We ended the fourth quarter with $309 million of cash and marketable securities. Turning to our outlook. Q1 represents a good start to our year. And tonight, we are reiterating our 2024 guidance. We continue to expect revenue for 2024 to be in the range of $259 million to $269 million for the year. We expect subscription revenue to be roughly similar to that of 2023 and to grow incrementally each quarter this year with contracted go-lives, the full impact of which will be evident in the fourth quarter.

As to adjusted EBITDA, we continue to expect our 2024 adjusted EBITDA to be in the range of negative $160 million to negative $155 million. Additional context around our assumptions remains unchanged. We are on track to reduce our Converge-related R&D spend annually by 25% to 30%. However, government-related customization of our platform will moderate the overall decline in R&D to a circa mid-teens percent reduction for the year. Our head count actions will result in over $15 million in compensation-related savings, so our guidance assumes we return to normal levels of incentive compensation versus 2023. The progress we have made in recent quarters significantly adds to our financial visibility and meaningfully derisks our path to adjusted EBITDA breakeven.

The impact of our plan supporting the DHA, including the enterprise expansion, is not fully visible with a single year of guidance for 2024. And so in February, we took the extra step of providing a range of longer-term financial expectations, the highlights of which are as follows. We expect revenue in 2025 to be in the range of $335 million to $350 million, representing growth of circa 30% compared to 2024 primarily driven by go-lives of contracted software backlog, including our planned enterprise-wide DHA deployments. We further expect an approximate 70% improvement in our adjusted EBITDA to a range of negative $45 million to negative $35 million. We expect the change in our revenue mix towards subscription software to lift gross margins from the high-30% area in 2024 to over 50% in 2025.

After configuring our platform for operation in the government ecosystem, it will be fully scalable and ready to deliver complete hybrid care across the entire MHS enterprise with minimal future development required. And finally, rounding out our forward-looking expectations, we currently expect to achieve adjusted EBITDA breakeven in 2026 with a cash investment balance of approximately $150 million. In conclusion, we are encouraged by the strides we have made in our business, and in Q1, we made good progress toward our goals. We believe we are just beginning to capitalize on the opportunity in front of us, and this guidance marks the early days for the long-term profitable growth trajectory we envisioned. Thank you for listening. With that, I’ll turn the call back to Ido for some closing remarks.

Ido?

Ido Schoenberg: Thank you, Bob. In closing, I would like to thank our teams for the work we completed in Q1. We are on track for our goals and we made progress towards our strategic initiatives. And if we deploy and migrate our customers and the market takes note of the benefits of the hybrid care we enable, we are solidifying our role as a digital transformation partner. We believe we are just getting started. With that, we are ready to conclude our formal remarks. Thank you for listening today. Operator, we are ready to open the line for questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Charles Rhyee with TD Cowen. Your line is open.

Charles Rhyee: Yes. Thanks for taking my questions. I wanted to first ask about the number of the renewals that you kind of highlighted, Intermountain, Cleveland Clinic, et cetera, and maybe get a little bit more details on maybe sort of length of these renewals, if they were adding any new capabilities, any kind of additional commentary you could provide on sort of the value they are currently benefiting from Converge and sort of what their road map looks like in terms of advancing further with you guys. Thanks.

Ido Schoenberg: Hi, Charles, thank you for your question. The duration of our agreement did not change much. It’s roughly around three years, give or take. The renewals are, first and foremost, a vote of confidence in Converge. Usually, old clients that renew are looking at the new platform. And each new client does look to add new elements to it. And of course, those elements and those solutions, in addition to traditional neutral visit of on-demand or scheduled, vary from one client to another. I’ll give you a few examples. Payers typically, and Elevance is a good example of that, add virtual primary care. We believe we can see it enormously valuable and has a lot of potential for growth, adding a lot of value to members and creating a lot of savings and impact, clinical and financial, to the sponsors.

In addition to that, we see same-store growth, certainly relevant for renewal, in all the area of automated interactions. Automated interactions are very broad in their impact. They could be as simple as facilitating bureaucratic activities like showing up for appointments for colonoscopy, all the way to managing complex illnesses like diabetes and others. And that’s certainly something that we’ve seen. And I gave at least one example, the Blue plan. That’s a new client actually — I’m sorry, that’s an expansion, so that’s very relevant to your question. Another example that we see now in renewals and expansion is shortage of staff in hospitals. And the ability to add to the roster of nurses that extend their career, and could be very helpful in saving hours and hours of time in facilitating things like admissions and discharges, is very significant to many of our customers.

Lastly, last example, and there are others, but we’re short of time, is the whole notion of collaborative care as it relates to behavioral health. Our ability to use SilverCloud technologies to help primary care providers drastically improve access to behavioral health services is something that many of our customers are very interested in. So in short, I believe that all of our renewals are really focusing on the broad capabilities of the Amwell platform today, which is very different from our legacy offering.

Charles Rhyee: I appreciate all that detail. And you mentioned Elevance adding sort of virtual care. Just curious your thoughts here, the recent announcement of United with the Optum virtual care platform being kind of wound down here. I’m just curious on your thoughts on what that says about the market here for virtual care and the role that payers play in that. Thanks.

Ido Schoenberg: Sure. So as you know, United is a very old partner of Amwell. We have a very strong relationship that dates for a really long time. Those relationships are strong and the internal events within the United Group, I do not expect to have a material impact on our relationship or at least impact on our guidance as to the specific case that you’ve mentioned. But certainly, and you’re absolutely right, we’ve seen quite a few examples where tech-oriented companies offer their care and it was very challenging for them, and quite a few exited this business. In many ways, we believe the testimonial of how difficult an offering and doing what we do is, in the sense that it’s really important to work with existing providers that are trusted.

Managing this network for digital services is far from obvious, and the technology that is required in order to do that is nothing but a commodity like some people suggested. United and many others reaffirm their deep commitment to hybrid care and digital care. So it’s important to understand that those people that exit, including Walmart and others, do not say that easier access to health services is not something important, they just realized that some of their initial models really were struggling a little bit to find their way. We see that as affirming our view where we offer technology to connect existing trusted providers with consumers but opening the gate to a tidal wave of technology innovation that we believe could be very, very impactful.

And if you want one example, it’s the use of automation and AI. We believe that those technologies could have a far-reaching effect on improving the outcomes in health care. It’s almost impossible to use them as a stand-alone. And in the context of interacting the trusted providers and patients, they could find a very good way to realize this potential.

Operator: Your next question comes from Craig Hettenbach with Morgan Stanley. Please go ahead.

Craig Hettenbach: Yes. Thank you. Just a question on the DHA program and really looking for just any key milestones to watch as we progress through this year and what that means to the visibility of the program and the setup into 2025?

Ido Schoenberg: Absolutely. And Bob can follow with some financial observations. But essentially, our relationship with the DHA and with the Leidos partnership on health is really terrific. They’re very experienced. It is a very large project, and it’s going very well. We’re going to really do everything we can to make sure that it continues to grow very well. As I shared in the prepared remarks, the first milestone for the year is behind us. We went live with behavioral health which, according to the client preference, was the most urgent thing for them to deploy. As I mentioned earlier, there are two more milestones: the deployment of Converge, which we are focused on right now; and lastly, the deployment of automated care towards the end of the year with expected enterprise rollout at the end of the year. We believe this time line is still very realistic and very viable going forward. Any other comments, Bob?

Robert Shepardson: Yes, Craig, thanks for the question. I guess I’d say, from a revenue perspective, you can expect to see the lion’s share of the impact in the fourth quarter, with a lot of that revenue coming on with go-lives in the fourth quarter. And for the first couple of quarters, Q2 and Q3, you’re going to see a lot of services revenue come online. There’s two components to the services revenue that we’ll be recognizing as we go forward here on the customization of the platform. One is recognizing the revenue is tied to go-lives, so there’s that aspect that we won’t see in the next two quarters. But then there’s another leg of that, that we will see, and it will drive significant growth in our services and Carepoints revenue in Q2 and Q3.

So from a financial perspective, you’ll see a few things going on. Revenues, highly fourth quarter focused there. Services revenue, you’ll see come on in Q2 and Q3 in a meaningful way. Those will be our largest quarters from a revenue perspective in services and Carepoints. And then you’ll also see capitalization of software spend, R&D spend, much higher in the second and third quarters as well. So I think financially, that’s what you can expect as it relates to the DHA book.

Craig Hettenbach: That’s helpful color. I appreciate it. Just a quick follow-up. And Bob, you touched on just some of the cost initiatives and kind of path to breakeven. What are some key variables that you’re mindful of in terms of marching towards that breakeven, like any potential tailwinds or headwinds on the cost side of things?

Robert Shepardson: I feel like we’ve got it pretty programmatic at this point, Craig. As I think about the components, I think gross profit is going to rise very meaningfully over the next few quarters, so getting us back to about what we did last year on the cost of goods sold side and the resulting gross margin, and then increasing to north of 50% the next year. So I don’t see much concern around that. . And then as I think about the operating expense line items, we have a very good lead on the Converge-related spend and the declines there. Continue to expect that’s going to be in the area of 30% year-over-year and have a very good idea and a lot of comfort, I think, built into what we’re spending for customization in the government sector.

So I feel like we’ve been conservative in how we’ve estimated that, and the mid-teens decline reflects that level of conservatism and the contingencies built in for that work. And in SG&A, I think we’ve taken some actions in January. I expect that we’ll find incremental efficiencies going forward on the SG&A side. I think historically, we’ve been talking about a lot of operating leverage there. I think we’ve got scope to actually take those costs down year-over-year. So I think those are really the points I’d make. I don’t know, Ido, if you had anything you wanted to add.

Ido Schoenberg: Yes. Maybe giving you some color from another angle. As Bob mentioned, the big event, of course, is the completion of Converge. The platform is built and proven, and that allows us to really greatly reduce the R&D investment. In addition to that, we spent the last few months really focusing on efficiency and effectiveness in the company, across the entire company, with special focus around the efficiency and effectiveness of our growth organization. So together with third-party consultants and our own team, we took a fresh look on the market. A lot has changed in the market and that drove some very interesting opportunity as it relates to our strategy and the focus. We redefined our TAM and SAM and chose to basically redefine also our business line with special emphasis around the profitability.

We took a new market segment, and we decided to focus on segments where we have the highest right to win and there’s opportunity to generate better gross margin, especially if driven by favorable mix towards the software subscription. We did change our entire growth organization. We built a whole new structure around sales operation to support the strategy that is fit for the current market condition, the competitors and Converge. Our marketing is really resonating right now with the market. It was revisited. We upskilled our talent. We brought some people from the outside in an area that’s needed to and trimmed on people that are less relevant to what we’re doing. We trained the entire staff on the new plan, and we created new comp plans that really are encouraging our team to focus on higher-margin software subscriptions.

And clearly, one of the outputs is that we have less quota carriers and the bag they are carrying is much broader. That’s not only interesting financially with real effectiveness, that means that these people are able to tell a story of a much more broad end-to-end solution that we believe the clients appreciate. We no longer have separation around business lines. Other consultants are able to talk about our entire portfolio. We no longer have hunters and farmers. We really have one team that is nurturing the relationship with both new customers and existing payer customers. So these are some examples on what happened in the past few months in Amwell. And the net of it is that we believe that we have already achieved much more focus and efficiency in our organization, and we fully expect to continue those efforts over the next couple of quarters, which will be demonstrated also in our cost structure.

Operator: Your next question comes from Jessica Tassan with Piper Sandler. Please go ahead.

Jessica Tassan: Hi, guys. And thanks for the question. So I wanted to confirm, first off, the sequential growth you’re guiding to from a subscription perspective, that contemplates kind of known and understood attrition and is net of that attrition?

Robert Shepardson: Yes, that’s correct.

Jessica Tassan: Okay. Awesome. And so then my follow-up is just I think you guys mentioned that the DHA has expanded, in some respects, into behavioral capabilities that were not part of the initial deployment. Can you just help us understand what’s the scope of the initial deployment from a product perspective? And then what is this incremental behavioral business? And my last one is just can you confirm that the DHA enterprise-wide deployment is like locked and loaded, funded and poised to occur in the fourth quarter of the year? Thanks you