MP Materials Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 12 speakers on the call.

Operator

Good morning, good afternoon, and good evening. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Amwell Q3 2023 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 Q3.

Speaker 1

Q3.

Speaker 2

Thank you. Q3.

Operator

I would now like to hand the call over to Sue Dooley, Head of Investor Relations with Amwell. Sue, you may begin.

Speaker 3

Hello, everyone, and welcome to Amwell's conference call to discuss our Q3 of 2023. This is Sue Dooley of Amwell Investor Relations. Joining me today are our Chairman and CEO, Doctor. Ito Schonberg and Bob Shepherdsen, our CFO. Earlier today, we distributed a press release detailing our announcement.

Speaker 3

The release is posted on our website at investors. Amwell.com and is also available from normal news sources. This conference call is being webcast live on the Investor Relations 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 this call, we'll 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.

Speaker 3

Except as required by law, we undertake no obligation to update or revise these forward looking statements. On the call, we'll refer to both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP financial measures is provided on our posted earnings release. With that, I would like to turn the call over to Ito.

Speaker 4

Thank you, Sue, and hello, everyone. In Q3, our business moved forward in 3 important ways. We won a striking new opportunity supporting the United States Federal Government, specifically the Defense Health Agency's Digital First Initiative across the military health system. We are excited by this important validation of our new converged platform and the expanded opportunity it awards us. We also accomplished our goal for client migrations and reach our metric of 50% of visits on converge a quarter ahead of schedule.

Speaker 4

In addition, we made significant progress in transforming our growth organization to maximize the commercial impact of our solution. Finally, we demonstrated the value and benefits of our approach through compelling customer testimonials. I'd like to take some time to go into each of these highlights. The standout event of Q3 was the previously announced $180,000,000 task order awarded to the Leidos partnership for Defense Health, which includes Amwell. Together, we aim to modernize and provide digital health enablement to DHA providers and patients.

Speaker 4

Let me jump right into some details I can share. With the Leidos partnership, Amwell was selected to power a multiyear transformation as part of DHA's Digital First initiative. This award followed a rigorous data driven evaluation process and our converged solution emerged as uniquely qualified. The award demonstrates our market leadership position as an enabling digital transformation partner. It also extends our TAM, expanding our reach into the government and public sectors.

Speaker 4

This is a major event in our company's history that increases our revenue visibility and fortifies our path to profitability. After the initial phase next year, the enterprise rollout outlined in the task order would place the U. S. Government among our largest customers with a very substantial weighting in reoccurring software revenue. Work has already begun.

Speaker 4

Roy, myself and our entire team are so proud of this exceptional opportunity to serve this very special group of people. Bob will provide you with more of this in a moment. Continuing with highlights of Q3, we drove a steady pace of client migrations. Over 50% of our visits were completed on converge in Q3, up from 43% last quarter. We achieved this milestone a quarter earlier than our plan, propelled in part by our strategic payer client that went live late in Q2 and continue to scale rapidly and drive healthy volumes in Q3.

Speaker 4

With over half of our volume now on converge, the data is confirming that our new platform is a game changer. Migrated clients consistently scale rapidly and report high provider and patient satisfaction metrics. Continuing with the theme of solid execution. We are deep into our efforts toward the payer migrations that will start to go live early next year. Q3 was a very active quarter for us.

Speaker 4

Here are a few additional examples of our success. We also announced a partnership with Nestle Health Science. The partnership leverages our automated patient journeys with Nestle's expertise in nutrition. The first of several programs is for patients undergoing major surgery. On CONVERGE, Providers will be able to deliver Nestle content to better prepare patients for surgery, aiming to improve outcomes while minimizing length of hospital stays, lowering risk of surgical complications and reducing costs.

Speaker 4

And in yet another notable booking, we had a strategic win with a new Medicare Advantage program in Georgia. This client is looking to a differentiation in the market and fuel their growth initiatives by building out their hybrid care offering to include behavioral health. Turning now to our growth transformation, we are taking swift action and these efforts are well underway. Here are some of the initiatives we have in place to expand pipeline and drive deal velocity as well as overall efficiency. We completed the summer of learning and we are hiring and upskilling with precision, assigning proven leaders to key growth teams, including strategic accounts, sales and sales operations.

Speaker 4

We are putting in place the data and rigor that enables our team to focus our sales initiatives on the key segments where we see high subscription software content, high profitability and right to win. We realigned our product solution leaders within our commercial organization to enable faster go to market for new products. Finally, we also streamlined and rationalized our commercial headcount supplementing our ongoing corporate cost reduction initiatives. I'm proud of our teams. We believe these changes are already fueling the sales discussions that will provide the foundation for long term partnerships, high customer value and retention.

Speaker 4

In that spirit, we were active at Becker's and Oracle Health Conferences during Q3. We also held 2 of our own virtual forum meetings targeting the provider and payer markets. These are important demand generation events for sharing our vision and the benefits of our approach. Here are some of the customer testimonials we shared. With our hybrid care programs AU Health's Candler County Hospital drove a 35% increase in net revenues and a 50% reduction in transfers resulting in a positive operating margin in fiscal year 2022.

Speaker 4

Northwell Health continues to provide a shining example of focusing on engaging patients to improve outcomes. Northwell's expanding use of our automated programs now extend to 35 specialties, addressing many operational challenges with powerful results. For example, with our automated programs, Northwell reduced colonoscopy no show rates by 48%, capturing 800 more procedures and $1,000,000 in additional annual revenue. They reduced readmissions by 32%, closed gaps in care in 69% of the interactions and identified high risk pregnancies in 16% of routine automated monitoring interactions. And importantly by leveraging automation, Northwell is the line providers to focus more on patient care, boosting staff satisfaction and retention while increasing productivity.

Speaker 4

Finally, our virtual nursing discharge solution is delivering for clients. In the 1st months of deployment, University of Pittsburgh Medical Center successfully completed over 1300 virtual discharges, saving about 40 12 hour nurse shifts while registering high patient satisfaction scores. We are rapidly documenting and sharing these client success stories for case studies, webinars and events. We believe these proof points will inspire other clients and prospects to view our Converse solution as a must have. I would like to close my remarks with a brief comment.

Speaker 4

Today, we have a front row seat as we partner with the most strategic players in healthcare as they strive to own and optimize the patient and provider experience. After years of internal investing and struggling with fragmented IT assets, health organizations are increasingly turning to us. They recognize the value of a partner who can speed the path to the right hybrid care modalities to achieve their goals. And with our DHA win, we added yet another name to the strategic clients that are choosing Amwell as their partner. As I think about our company, I believe we are at the turning point, leaving behind us many of the risks of replatforming and rapidly putting in place the strategies to pursue our market opportunity and realize profitable growth.

Speaker 4

We have shared many green shoots with you tonight. As we emerge from this time of transformation, it is clear from our vantage point, The market is moving to us. With that as context, I would like to turn the call over to Bob to review some of the DHA specifics, our Q3 financials and key metrics plus our guidance.

Speaker 5

Thanks, Ito, and hello, everybody. I would like to walk you through a few operating metrics and financial results from the Q3 as well as our guidance. Then I'm eager to provide you with some more context regarding our DHA win building on our press release issued last month. While our financials continue to reflect our transition to converge, Our business moved meaningfully ahead this quarter in terms of client migrations, our growth transformation, normalizing, rationalizing costs and of course, the DHA win. To review, we ended the 3rd quarter with 104,000 active providers, flat compared to a year ago.

Speaker 5

This represents a slight decline from last quarter as during replatforming efforts temporary declines can occur. We continue to view active providers as an important indicator of the sustained value our clients see in our platform and we anticipate that our number of active providers will increase as we migrate existing and implement new clients on to Converge. Total visits were approximately $1,400,000 in the 3rd quarter, about equal to last year. Scheduled visits represented 65% of the total in line with our experience over the last few years. As it relates to visit volume patterns, we continue to believe that we are returning to more typical seasonality with 2nd and third quarters lower than the 1st and 4th, which was less apparent during the pandemic.

Speaker 5

We continue to make good progress successfully migrating our clients to the new platform. And Q3 successful migrations drove visits on Converge for the quarter to 50%, up from 43% in the 2nd quarter and cross the 50% threshold 1 quarter earlier than our target. And as Ito said, payer migrations have begun. Given payer visits are tied to the enrollment cycle at year end, we expect to see payer related visits transition to converge beginning early next year. Total revenue was $62,000,000 for the quarter, about flat to last quarter and down 11% from a year ago.

Speaker 5

Approximately 50% of that decline in revenue versus last year was subscription related, driven primarily by legacy platform declines with a balance split between lower visit and services and CarePoints revenue. Subscription revenue was $28,400,000 in the 3rd quarter, up slightly from Q2. AMG visit revenue trended 7% lower than last year and was $26,700,000 AMG visits were 8% lower versus the Q3 of 2022, reflecting a return to normal seasonality with last year elevated due to COVID inflows volume. Average revenue per visit was slightly higher than last year at $77 driven by better urgent care pricing. Our services and care points revenue was $6,800,000 for the quarter, which represents an increase of 8% from last quarter, driven primarily by growth in marketing services.

Speaker 5

These revenues are lumpy from quarter to quarter due to customer buying patterns for our marketing programs and for CarePoints, as well as the timing of professional services that precede deployments. Turning to profitability, our 3rd quarter gross profit Margin was 35%, down from 39% last quarter and 40% last year, largely on a revenue mix shift away from higher margin implementation services to marketing services, which are strategic to our clients, but lower margin. Turning to operating expenses, we are applying ongoing cost discipline across our company. We are tracking well on our path R and D normalization. While GAAP R and D expense was 7% higher versus last quarter at $27,700,000 It was 16% lower after adjusting for $7,100,000 of capitalized software costs in the 2nd quarter.

Speaker 5

This was 24% lower than the Q3 of last year. As we have discussed, we believe that the Q4 of 2022 represented our peak R and D spend and that we will exit 2023 with an R and D spend down mid-20s percent from this level. Sales and marketing spend declined 5% and G and A expense was 19% lower this quarter compared to last quarter. We continue to expect SG and A to decline approximately 10% overall for the second half versus the first half of twenty twenty three, primarily due to lower stock based compensation expense. As Ito outlined, we are streamlining and rationalizing our commercial headcount in keeping the growth changes.

Speaker 5

We do not need to spend more in SG and A to achieve our growth goals and there is healthy operating leverage as we scale. Adjusted EBITDA for the quarter was negative $38,500,000 a 15% improvement on last quarter. Also, we recorded a non cash goodwill impairment as a result of the decline in our market capitalization as compared to the carrying value of our equity as of September 30. In arriving at this amount, we estimated the fair value of our equity based on our market capitalization and a related control premium. As a result of this interim quantitative impairment assessment, we recorded a $79,000,000 non cash goodwill impairment charge.

Speaker 5

Transitioning to the balance sheet, we ended the Q3 with $418,000,000 of cash and marketable securities. We have a substantial cash position, which provides us ample resources to complete the transformation of our company with Converge and take us to profitability with a substantial remaining balance. Concluding my review of our financials and turning to our outlook, We continue to believe that revenues for 2023 will be within our guidance as shared on our Q2 call. I would like to speak for a moment on how we are thinking about our EBITDA in the Q4. Regarding the DHA, we have a rapid deployment timeline for this critical work and our work is underway.

Speaker 5

This spend is incremental to our prior assumptions for the Q4 underlying our adjusted EBITDA guide for the year. We expect this investment will be in the area of $2,000,000 in the 4th quarter and as such we are adjusting our prior 2023 adjusted EBITDA guidance by $2,000,000 to a loss of negative $162,000,000 to negative $167,000,000 from a loss of negative $160,000,000 to negative $165,000,000 We view this incremental spend as a high priority as we undertake the important development and deployment work with our Leidos partners and the DHA to build and deploy CONVERGE for the military health system. With my financial review and guidance complete, Here is some additional detail on Amwell's important role in the DHA's digital first initiatives and the powerful catalyst this win represents. We are honored to be we are honored to have been selected to support a multiyear transformation of DHA's care delivery model. The task order awarded to the Leidos partnership has a 22 month period of performance and is valued at up to $180,000,000 that includes several parties in addition to Amwell.

Speaker 5

Under the agreement, the partnership in Amwell will deploy multiple automated care and digital behavioral health solutions and replace the legacy military health system video connect capability with Amwell Converge starting with an initial phase during 2024 followed by a full enterprise rollout. Amwell represents a meaningful portion of the task order allocation, but we are not in a position to disclose specific amounts related to Amwell or any other However, I can share today that Amwell's total allocation of the task order is sizable and includes predominantly software revenue. In the initial phase, it also has professional services component related to deployment. This win meaningfully adds to our total addressable market, extending our reach into the U. S.

Speaker 5

Government, healthcare and public sectors. To provide some additional context, Our subcontract with Leidos was finalized quite recently and so there will be no revenue impact on Q4. But the initial 5 site deployment does add to our visibility as we consider next year's guidance, which we will share in February. There are a few important things to keep in mind regarding scope and timing. The initial phase of deployment standalone fortifies our long term model and positively impacts our cash position.

Speaker 5

The enterprise rollout outlined in the award would involve a meaningful expansion comprised of nearly all recurring subscription software revenue. As Ito mentioned earlier, this would place the U. S. Government among our largest customers as early as 2025. Regarding the enterprise wide potential, DHA has a beneficiary population of roughly 9,600,000 service members, retirees and family members and manages authority, direction and control of 9 medical centers, 36 hospitals and 525 clinics across their global enterprise.

Speaker 5

I would like to take a moment to share what we can about the investment associated with this effort, which further supports our commitment to the government sector. Together with the partnership, we will build and Upon go live of the initial phase of deployment, the platform will be fully scalable and ready to deliver complete hybrid care across the higher enterprise without additional future development required. The investments associated with the initial phase will continue through 2024 and are incremental to our planned R and D spend. Importantly, the initial phase of deployment is cash flow accretive on its own over the 22 month period. As we proceed into the enterprise rollout, we will try to provide updates as specific milestones are behind us.

Speaker 5

Wrapping up, we are honored and privileged to have been selected to serve this important community. Building on the validation we have from other major players in the healthcare industry like Elavance, CVS and others. The DHA can be a powerful catalyst for us as we exit our time of transformation to converge. To briefly summarize, we are encouraged by progress in our business. We have strong validation of our approach, Success migrating clients and we believe we have the right initiatives in place to enable our growth organization.

Speaker 5

As we enter the 4th quarter bolstered by the potential that our DHA win represents. We are confident that our broader growth initiatives will advance us along our path to profitability. Thank you for listening. With that, I'd like to turn the call back to Ito for some closing remarks. Ito?

Speaker 4

Thank you, Bob. With Q3 behind us, we are focused on 3 key areas of execution as we look to close out the year in a strong position setting up for 2024. 1st, we are finalizing our growth transformation. 2nd, we will continue migrating clients on to converge. And finally, working with our LPDH partners, we are beginning the important deployment work supporting the DHA's Digital First initiative.

Speaker 4

Before we take your questions, I'd like to share an insight from our time spent with clients in the market this quarter. Healthcare remains one of the final frontiers for optimizing for technology. It's still early days for our industry as we evolve towards hybrid care delivery, but we believe the industry is ready for this change. At Amwell, we are driven every day to Inspire and enable our clients to evolve their approach to hybrid care is to pursue our mission and drive us toward profitable growth. With that, we are ready to conclude our formal remarks.

Speaker 4

Thank you for listening today. Operator, Please open the line for questions. Thank you.

Operator

Thank you, Doctor. Schomburg. Ladies and gentlemen, at this time, I would like to remind everyone that in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. And as a reminder, we please ask that you limit yourself to one question per time.

Operator

We will go ahead with our first question from Craig Hettenbach from Morgan Stanley. Your line is open.

Speaker 6

Thank you. Congrats on the DHA win. In particular, in terms of the rigor of the evaluation, is there anything else you Share in terms of any the amount of solutions besides Amoil that they evaluated and what you think gave you the biggest edge to quench that deal?

Speaker 4

Hi, Craig. Sure. I'll try to give more color. This was we've known the DHA for a long time. We started to serve the U.

Speaker 4

S. Navy 5 years ago, and we participated in numerous pilots. This effort was relatively short, but very, very deep evaluation, very robust. The nature of the way that the prime contractor works is such that we are preview to other options and vendors, and we're not able, even if we're known, to share that. But I can share with you that they did look at every detail and the plan for deployment is there.

Speaker 4

What they did share with us during the award process and the selection process is that they were very impressed With our maturity and track record, we serve very, very large clients and strategic in their size and even bigger. I think they like a lot of the elements of the technology. Of course, this call is way too short to describe the list. It's pretty long. I can give you just one example maybe.

Speaker 4

We are able to have a dynamic scheduling for a provider. We call it dynamic provider queuing. And that allows when this system is deployed globally for a sailor in Hawaii to seek care very close if it's available, but if not, based on multiple fairly complex rules, We can expand the reach really anywhere around the globe and make sure that they have a much better access to care. In addition to that, the DHA and MHS were very vocal, including the Secretary of Defense Lloyd Austin and the Director of the DHA, Talitha Crosland, about the importance of taking care of people, they call it TCAC. And they talked much about the crisis in access to behavioral health services, to chronic care, to wellness and we have all that.

Speaker 4

So the comprehensiveness of the offering in the converge match very well the need of the clients. I would add maybe one more element. This is really a partnership that includes many really good participants, including our long time partner Oracle Cerner. The fact that we've worked and integrated with Oracle Surna for many years, I think was also helpful for the client to feel that the risk in this deployment is lower and we can all work really well together.

Speaker 6

Great. Thanks for sharing that.

Operator

Thank you for your question. Our next question is from Stan Bernstein with Wells Fargo Securities. Your line is open.

Speaker 7

Hi, thanks for taking my questions. Maybe on the guidance, you have a pretty wide implied range on the Q4. Can you just walk us through What's driving the upside and downside of that range? Thanks.

Speaker 5

Hey, Dan, It's Bob here. So we I think we left the guidance in place, primarily because the Q4 can have some pretty large swings on visit volumes. We saw that last year when we had an early and severe flu season, drive some Pretty meaningful volumes. So we opted to leave that in place. That would really be the factor that might move things around within the range.

Speaker 5

And as you saw, we also widened out a little bit on the cost side associated with the DHA.

Speaker 7

Got it. And maybe just a quick follow-up on that. How should we think about the incremental impact of the R and D spend as we model 2024?

Speaker 5

Yes. I would say on that, We've done, I think, a real good job in delivering on the cost savings associated with R and D as we progress through the year. And I think we'll continue to see those types of declines through the end of the year. Next year away from the spend associated with the DHA contract and customizing and implementing and integrating there. We would continue to be on a path towards normalization in that 25% to 30% of subscription revenue over the next couple of years.

Speaker 5

So that's proceeding as plan as we kind of get into the budgeting come to the end of the budgeting process and are working very closely with our LPDH partners here on the deployment. I think we'll be in a much better position to guide on spending for next year incremental what we've had out there.

Speaker 4

Great.

Operator

Thanks for your question. Our next question is from Jalendra Singh with Truist Securities. Your line is open.

Speaker 8

Thank you, and thanks for taking my questions. And congrats on the DHA contract, and I appreciate all the color there. My question is around the your kind of core business where you talked about in the past, a strain on your provider clients' buzzers as they're trying to deal with some staffing shortage and improving patient experience. And you guys have called out sales process getting elongated. Just curious if you can provide any update there?

Speaker 8

Have you seen any improvement in trends? And a little bit more color on capital spending from your provider clients in particular.

Speaker 4

Hi, Julien. This is Ito. Essentially, there is obvious pressure in the market, cost pressure that Is apparent to anyone that is there. With the converge especially, we have So in a high level, we are able to prove that we are helpful in improving things like staff retention and member retention. We have long list of ways to tension.

Speaker 4

We have long list of ways to impact efficiency, and I gave a few examples for that as well. And we have ways to expand the scope of products or services that our clients can offer and drive top line for our customers. So as more of those proof points are becoming available in the market, Our repositioned growth organization is having an easier and easier time to articulate the rationale behind those investments even in time of cost pressure. I would also add that we see quite a bit of consolidation in the market, especially in provider rail market and converged service is a really effective electronic glue between those organizations. So it's a very good way to integrate a lot of your digital assets and that allows you to do many things, including some serious IT cost savings and ability to create immediate integration of data and services that seems to be very high priority for these type of organizations.

Speaker 4

I would also add Lastly, that the staff pressure is really significant. Nurse shortages especially, The digital discharge that we have and many other programs are hitting home with many of those customers and allow them to basically expand the reach of the staff that is in such a short supply during this period. So overall, this is not a luxury product and add on innovation type thing like telehealth used to be a few years ago. This is a necessary day to day infrastructure that is now proven to improve financial performance for our customers. And again, we have the proof points and some of them were shared with you today.

Speaker 8

Very helpful.

Operator

Thank you for your question. Our next question is from Jack Wallace of Guggenheim Securities. Your line is live.

Speaker 1

Thank you. I've got a follow-up on the MHS award. And just thinking about some of the upfront spend, Yes, particularly on the customization. It sounds like, Bob, you mentioned that there's an element of that that was going to be cash flow accretive. And then I just wanted to confirm that whether that was from an upfront spend standpoint or if there's a margin on the professional services component.

Speaker 1

And then second to that would be how much of the upfront build here would be transferable In the instance for say the VA would also have a similar type award and this would make for an easier plug and play opportunity there. Thank you.

Speaker 4

Hi, Jake. I'll take the second part of your question and let Bob do the first part. So in the initial phase, we will do a lot of work to integrate into the gov cloud, the government cloud, the EHR Genesys and comply with many rules and regulations for this unique environment, including cybersecurity and other elements. Nothing in this work is risky in our opinion. The work is very clear.

Speaker 4

We know what to do. And we are very comforted by the enormous experience of other partners like Leidos and Oracle that Oracle Cerner that are very familiar with the environment and are going to do the work together with us. This work is directly relevant for clients who are potential clients who are not included in this task order, 1st and foremost, the VA. As I'm sure you know, the MHS Video Connect, the one that we are replacing and modernizing for the DHA is really a derivative of the VA Video Connect. And the EHR, the Vista is very similar to the one we are integrating with.

Speaker 4

Very much like the DHA, the VA is also very, very large. It's actually larger then the DHA, the 172 Medical Centers, over 1,000 clinics and about 9,000,000 enrollees. So and there is another really important point, which is the system is built for a continuity of Care. I mean, essentially, there is movement between those two population that is important. And that's why In many ways, these organizations typically choose similar solutions.

Speaker 4

So we believe that that initial effort will position us very well to compete for the business of the VA and other public entities. Bob, maybe you'll take the first question.

Speaker 5

Yes. So thanks, Ito. So Jack, the thank you for the question. The initial this is think about it in 2 phases. There's an initial deployment phase and then a full enterprise rollout.

Speaker 5

If we just think about the initial deployment phase, that in and of itself is cash flow accretive AmWell. So that's a positive cash generator for us over the 22 month period of performance. And to go from the initial deployment to the full enterprise deployment and that's to the full 9,600,000 people that the DHA provides care to and across the 47 or so Hospital and Medical Centers and the 525 Clinics. There's no incremental investment required to go from that initial deployment to the full enterprise rollout. So you'll see all of that come on without any incremental spending to bring that on.

Speaker 5

It's basically to bring the 1st medical center on. We're going to spend just about everything we need to spend. So that's how you should think about it.

Speaker 1

That's helpful. Thank you.

Operator

Thank you for your question. Our next question is from the line of Ryan MacDonald of Needham and Company. Your line is live.

Speaker 9

Hey, thanks for the question and congrats on the DHA win. This is Matt Shea on for Ryan. Wanted to touch on the active providers. So I was surprised to see client providers ticked down again in the quarter. Just curious, was there any churn within that to call out or just replatforming?

Speaker 9

And with 50% of visits now on converge, should we expect to see that number start to increase sequentially now? And then On the AMG side also was just curious what drove that decline and if there's any gross margin benefit from less AMG providers.

Speaker 4

Hi, Matt. I'll take the first part and let Bob continue with a second. So we talked a lot in previous calls about what replatforming means. You have Some of your clients in legacy, some of them are migrating. There is an element of churn, but we talked about it and it's very much growingly in the rearview mirror where we stand right now with more than half of our volume already on converge.

Speaker 4

Per design, when you move from one environment to another, you lose people quite quickly, but you gain them a little more slower. So the answer to your question is that we certainly plan and expect to see a continued growth in our active providers. And I think Bob actually said that in his prepared remarks. As you may remember, there are big deployments also this year, but certainly early next year that are all going to increasingly contribute to raise this number. Bob, why don't you take the second part?

Speaker 5

Yes. And on the AMG side, I wouldn't read too much into the number of active providers. They're 10.99 and there is some impact from a gross margin perspective as we think about ramping up panels for our APC business. We need to have we have SLAs there. We need to have availability for subject to those SLAs.

Speaker 5

So that can actually have a having too many Too much capacity there can be negative from a gross margin perspective. But away from that on the urgent care side, I don't I wouldn't read too much into it. And we can be adding Some of our customers, we're building platforms to activate their doctors. And so we can be growing on that side of the business and you wouldn't see that on the AMG side. I think that addresses your question, but if it didn't, let me know.

Operator

Matt, thank you for your question. Our next question is from the line of Charles Rhyee with TD Cowen. Your line is live.

Speaker 2

Yes. Thanks for taking the questions. Maybe I know you touched on it kind of tangentially, but just Wanted to get an update sort of how bookings for next year are trending here through the Q3, particularly as you've kind of change sort of your go to market strategy. Maybe any update on the progress of sort of this implementation of the new Salesforce Focus on ROI.

Speaker 4

Hi, Charles. This is Vito. Thank you for your So where we stand today, we have very good stats on converge and very happy customers. So that's a really good starting point. We have a healthy pipeline, But very importantly, in the same way that we transformed our platform, we really transformed our growth organization to grow it methodically and meaningfully over the 2 years.

Speaker 4

So to give you more details as you requested, the first thing we did is upskilling of the team and the people. And we are now focused on we did some research and thinking and are focused on market segments and sub segments where we have very strong right to win and to maximize really the value and impact on profitability. I think a good example is our very encouraging hit rate with very large strategic customers. People tend to forget that we completed converge only this summer and we won not 1, not 2, not 3, but actually 4, 4 very large strategic customers on a platform that just emerged into the market. So that's definitely very good sign.

Speaker 4

We improved our methodology, the way that operating sales operation. We did a lot of work there. And we really optimized and increased the clarity of our communication. What we sell today is very different than what we sold with legacy, and I think we are able to communicate it much more clearly today. Very importantly, we build an infrastructure that allows us to capture and report proof points.

Speaker 4

You're one of the beneficiaries on these calls, but we have lots of other places, especially with clients, where we can really show the value of the different utilities in the new platform. As you asked in the question, We built a whole new solution organization that allows us to really have a dialogue with customers to understand their issues and build solutions that are right for them. And it's really not a slogan. We are not viewed as just a vendor. We are viewed as a partner and we are helping to transform those organizations and they do need help as they need to do a lot of important things.

Speaker 4

Lastly, we shared that we brought some very capable leaders, very mature and experienced leaders across all organizations, but especially growth led by Kathy Wyler from United. And we improved the way that the different units of the company between product delivery and growth working together as one team. So overall, all those efforts translate in our opinion to very good level of readiness to begin to grow our pipeline and convert it faster much faster than we did before.

Operator

Thank you for your question. Our next question is from Glenn Santangelo with Jefferies. Your line is live.

Speaker 10

Hi, thanks for taking my question. Hey, Ito, I just want to come back to some of the comments you made in your prepared remarks. I mean, now with 50% of the visits now migrated to converge. You seem to suggest in your prepared remarks that these migrated clients are scaling very rapidly and you sort of talk about all these proof points. But when I sort of take that back to subscription revenues, It seems like the total subscription revenue number has been stubbornly stuck in that high 20s number for a good number of quarters.

Speaker 10

And so I'm trying Get a better understanding for these already migrated clients like what the upsell opportunity looks like into these converted customers? Or Is that not the right way to think about it? Should we think about it more that this just strengthens those relationships and it's really about sort of winning new business?

Speaker 4

Well, Glenn, hi. There are multiple things here. One is, we still have legacy in the rearview mirror. And legacy comes with a number of pain points and it's drawing expenses and it's not developing the way it should because it's basically a platform that is going to be sunset. At the same time, you have a new platform that is looking fantastically well, but it's being implemented.

Speaker 4

And normally, especially with larger clients, there is a whole process here that takes some time. You integrate, you train, you grow and you don't grow overnight. I mentioned the timeline. We finished converged this summer. So we fully expect that to scale very nicely, But we have a lot of upside ahead of us with our existing clients in same store and also with the new ones, but it's going to accelerate as a new platform.

Speaker 4

So there is some time for it to take a full momentum of the opportunity and what you see is the combination in our number and that may be a little bit confusing, But these are the 2 conflicting trends that we see where we stand. We fully expect that to be a thing of the past as we finish next year.

Operator

Glenn, thanks for your call and your question. Our next question is from the line of David Larsen with BTIG. Your line is live.

Speaker 7

Hi. Congratulations on these large enterprise wins. It shows that Converge is obviously the right strategy. You've talked about sunsetting the legacy platform. Can you describe a little more like what exactly does that mean?

Speaker 7

Is that FTEs? Is that bodies? And how much money are you going to save once that platform is sunset. And then with the decline in R and D costs, can you describe the nature of that? Are you Is there an external vendor who is building Converge for you and then once you're at, call it, 60% or 80% or 100% migrated, The vendor kind of disappears.

Speaker 7

Just thanks very much.

Speaker 4

Sure. So a few things. When we talk about our legacy platform sunsetting as a goal, When that happens, a lot of good things happen for the company, keeping clients our own legacy for various reasons. They're not ready to migrate. Some of the functionality wasn't ready on time when they wanted to because we were building it and things of that nature.

Speaker 4

So about half of volume, a little less now is still there. Supporting an older platform and not investing it is expensive and it's uncomfortable for us and for our customers. So there's no question that once you have a single modern, very capable code base that is very high quality, It's less costly and very importantly, the customer sentiment is much better. The converged heavy lifting really finished this summer and we are, as Bob mentioned, We are really scaling down R and D very significantly. Our R and D include the core of engineers that are full time employees in Amwell.

Speaker 4

And we did work with quite a few contractors as we build the converge. And what you see right now is the reverse of that. So as we finish components of converge, we're able to reduce and normalize our R and D, which is really a potential to save a significant amount of equity. We are going to invest in the platform, but it's a normal proportion of our budget and all the extraordinary sums that you've seen in the past few years to really build this transformational platform. Bob, I don't know if you have anything to add.

Speaker 5

Yes. I would say a couple of things to add on. One is the amount of money that we estimate that We'll save once we're able to sunset those platforms is between $5,000,000 $10,000,000 And some of that is cost to vendors and things like hosting and other is and I would say the other piece of this is we have a lot of resources dedicated right now to migration. And obviously, once we're at a point where we can sunset those platforms, Those resources can be redeployed elsewhere. So, I think that's another part of how to think about what happens with the sunsetting in those platforms and the ending of the migration

Operator

Thank you for your question. Our next question is from the line of Jessica Tassen with Piper Sandler. Your line is live.

Speaker 3

Hi, guys. Thank you for squeezing me in and congratulations on the DHA. So I think we just wanted to understand the kind of positioning into the payer replatforming for 2024. I know we had 2 large strategic payers plus the DHA commit so far in 2023. So I guess At this point, does Amwell have complete visibility or complete commitment from payer customers heading into 2024?

Speaker 3

And can we think of 3Q 'twenty three as kind of the low point for quarterly subscription revenue from here with new strategic hospital cross sells and

Speaker 4

We have 4 strategics, 3 are named, 1 is not. All of them are fully committed to converge at this point in various degrees. 2 are live, one will be live early next year and the other one shortly thereafter. Q3. So that's the headline.

Speaker 4

Bob, why don't you take the second part of the question?

Speaker 5

Yes, I don't really I don't have an answer for you, Jess, Does 3Q represent the low point in subscription revenue? It could very well. I think as we think about the rollout here going forward, The DHA, obviously, there's nothing in this year for the DHA. That we will start to see revenues from them at go live next year and that will build because there are several go lives associated with that contract. I think the other important thing to note is, once we Once the government, the DHA makes the election to go to the full enterprise rollout, which we estimate for planning purposes to be towards the end of the year here.

Speaker 5

There's a step function in our financials from 2024 to 2025 that's really important to understand. And as I think I said earlier, That step function doesn't bring with it any incremental investment. So the initial deployment here, which is cash flow accretive over the just on the initial deployment over the initial the 22 month period of performance is all the spending that's loaded in for that full enterprise deployment. So, we I'm sure we're around the low point here of where subscription revenues should be, but the upside associated with The growth initiatives that Ito has talked about, as well as just looking myopically at this BHA contract that brings with it the potential for a dramatic expansion in subscription revenue.

Operator

Thank you for your question. We just have time for one final question that will be from the line of Diana Lee with Bank of America. Your line is live.

Speaker 11

Hi. This is Hannah Leland for Allen Lutz. Thanks for taking my question. Just wanted to know if there's been any updates on how you're thinking about the $400,000,000 profitability targets? And if you can What you're thinking about in terms of gross margin expectations or any OpEx assumptions related to those targets?

Speaker 5

Yes, sure. So the yes, we no real new thinking on it. We're other than, I would say, getting there has been meaningfully derisked over with what we've accomplished here over the last quarter. And that brings with it getting to that area of 400,000,000 over a 1,000 basis points of gross margin expansion as The lion's share of that growth is really going to be driven by subscription software revenue. So you combine that over 1,000 basis points of improvement with probably about 25% declines in operating expenses, driven primarily by declines in R and D spending over that period of time, but also pretty meaningful operating leverage in SG and that all kind of comes together to deliver a breakeven at in and around that 400 level.

Operator

Thank you for the question. We are just at time. So I'd like to turn it back over to Doctor. Schomburg for any final comments.

Speaker 4

Thank you, Aaron, and thank you, everyone. Thank you. We really appreciate you joining us this evening and wish you a great night.

Operator

Thank you. And ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Have a great evening. Take care.

Powered by Quartr
Earnings Conference Call
MP Materials Q3 2023
00:00 / 00:00