American Well Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 13 speakers on the call.

Operator

Afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the AmWell Q1 20 23 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

20 withdraw your question. We ask that you limit yourself to one question. Thank you. I would now like to hand the call over to Sue Dooley, Head of Investor Relations with AmWell. Please go ahead.

Speaker 1

Hello, everyone. Welcome to AmWell's conference call to discuss our Q1 of 2023. This is Sue Dooley of AmWell Investor Relations. 18. And joining me today are AmWell's Chairman and CEO, Doctor.

Speaker 1

Ito Schoenberg and Bob Shepherdsen, our CFO. 8. Earlier today, we distributed a press release detailing our announcement. The release is posted on our website at investors. Amwell.com 8 and is also available from normal news sources.

Speaker 1

This conference call is being webcast live on the IR page of our website where a replay will be archived. 8. Before we begin our prepared remarks, I'd like to take this opportunity to remind you that during the course of this call, we will make forward looking statements 18 regarding projected operating results and anticipated market opportunities. This forward looking information is subject to the risks 18.5% and uncertainties described in our filings with the SEC and actual results or events may differ materially. 8.

Speaker 1

Except as required by law, we undertake no obligation to update or revise these forward looking statements. On this call, 8 will 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 Ito. Ito?

Speaker 2

Thank you, Sue, and hello, everyone. 18. I'm pleased to report that Q1 was a very busy quarter for our company, one that provided a strong start to the year. We had 3 key accomplishments from the quarter that I want to highlight. First, 8.

Speaker 2

We made great progress with health system migrations and payer deployments are underway. 2nd, strategic clients went live this quarter, providing valuable in market validation of the power and Scale of converge, our unique whole person, one stop shop platform that supports the delivery of hybrid healthcare. 3rd, we put in place the building blocks that we believe will enhance reacceleration of our bookings 8. And we began to generate traction and momentum. I'll speak to that in a moment.

Speaker 2

More than ever, 8. It is clear that health care leaders need a partner to help them address the challenges of today and deliver the promise of digital first care. Our unique approach to the market is resonating. On tonight's call, I will detail some of our progress 18 as we pursue our key strategic initiatives, and I'll speak for a moment about the market for our solution. 18.

Speaker 2

After that, Bob will review some key metrics, our financial results and our guidance. 18, then we'll be pleased to take your questions. We began the year energized 18 with the knowledge that much of the transition to converge is behind us. We are also 8, powered by the validation of strategic clients who are selecting us as their partner. During Q1, we maintained the pace of client migrations and visit on converge rose to 36% 18 of total visits in Q1, up for 28% at year's end.

Speaker 2

18. A few examples of these successful migrations and implementations included Carillion Health, Olaf Medical, Altman Health and Intermountain Health. I am proud of our teams who drive these migrations. Our expertise in hybrid care best practices and deployments remains the differentiator 8 in helping our clients achieve their care delivery initiatives of today and as they make plans for the future. As we progress with migrations, converge continues to deliver exceptional scale, efficiency and experience.

Speaker 2

For example, in February, we completed a full system launch with health partners out of Minnesota. This enterprise wide go live is integrated with Epic 8 and used by clinical teams across many specialties and HealthPartners clinicians already conducting as many as 3,000 visits per day. Now I'd like to speak for a moment about our bookings related activity 8 as we pursued a tremendous opportunity in front of us. Q1 was busy with engagements eighteen with new and prospective clients across the payer and provider universe as well as effort to expand our footprint within our existing client 8. Here are a couple of examples.

Speaker 2

We began the year on a strong footing. 8. As one example, I'm proud to share a significant new customer win with Leading West Coast Health System. 18. This organization is replacing a legacy offering and we leverage AmWell Behavioral Health Solutions to improve response times, throughput and reduced length of inpatient stay.

Speaker 2

Continuing with bookings in yet another example 8. Of the potential that exists within our existing client base, we won a large expansion with a multistate Blue Cross Blue Shield plan. Aiming to consolidate vendors, this client partner chose AmWell to extend beyond telehealth 8 to achieve important and strategic goals around digital first hybrid health enablement. I'm pleased with how our relationships with these truly innovative organizations are growing beyond trusted telehealth provider Continuing with our efforts to build on our momentum in the market, our teams were busy in Q1 8 with demonstrable ROI based outcomes that are focused on the top priorities of health care leaders today. Here are a few examples.

Speaker 2

At ATA this quarter, our Chief Medical Officer, Kerry Nelson, presented with digital health leaders St. Luke's spoke to addressing the nursing shortage by extending care with virtual nursing centers 8 that reach more patients and geographies. And Prisma spoke to addressing the worsening shortage of nurses 8 with automated chat features. They achieved high chat resolution rate, which drove an associated 50 8.7% reduction in nurse calls with episodic checks. And with our ED discharge program, 8.

Speaker 2

Prisma described an estimated $4,000,000 per year savings with reduced readmits to the ED. We have a growing stable of testimonials supporting our innovative, purpose built 8 in AI powered automated asynchronous care programs. For example, at HIMSS, our clients from UCSF, Nemours Children's 8. And University of Pittsburgh Medical Center Health Plan presented their business case for numerous automated programs. The common threat from these presentations validates our hybrid care approach 8 that delivers higher rate of patient engagement, reduced costs, plus improved patient and clinician satisfaction.

Speaker 2

Our booth at HIMSS was well attended and was organized around a compelling visualization of the patient journey 8 in our unique role as the enabling partner for digital first approach to healthcare. Interest was high 8. And we held a record number of client meetings at this important event. Now I'd like to take a moment to discuss the market for our solution. After a robust quarter of client facing events, 8.

Speaker 2

It's clear from the feedback that at Amwell, we are on the right path, delivering a solution 18 that enables and empowers our clients in a world where a digital first approach to hybrid care is a certainty. It is also clear in my discussions with our clients that in the healthcare market, 8. Spending always requires rigorous prioritization. Hospital budgets are constrained 18. And the challenges facing providers and payers include widespread technological fragmentation, staffing shortages 18.

Speaker 2

In an urgent need to improve patient experience and outcomes. These all drive a demand 8 to evolve to a digital first model and leveraging technology to achieve operational goals. Despite the inherent challenges our clients and prospects are facing today, we think these investment priorities play right into our strengths. As we take our solution to the market, we are listening carefully, adapting with agility and driving with urgency. Here are a few examples of this.

Speaker 2

First, we are learning that our unified, 8 fully integrated hybrid care enablement platform, which glues together payers, providers, innovators and patients 8 represents a large unmet need in the market. We are also finding 8 that in addition to our buy for today, spend when ready strategy, clients are responding well 8 to converge component bundles, which already include a selection of our automated and asynchronous programs. And of course, we also understand that ROI and outcomes that materialize quickly 18 are a must in today's environment. And as I mentioned a moment ago, our library of examples is expanding. In response to this, we are going to market with an evidence based solutions oriented selling approach.

Speaker 2

This approach describes best practices Our teams strive in every conversation to convey that our solutions are the must have engine 8 to resolve their pain points today, connect all stakeholders and deliver on their strategic aspirations for the long run. This involves deploying enterprise grade team of leaders from sales, services and engineering 8 to address some of our clients' most strategic needs. We believe this structure extends our footprint within the client's organization 18 and increases the value we can deliver from day 1. As we look to accelerate our momentum in the market, 18. During Q1, we launched initiatives aimed at driving rapid adoption of our automated care programs.

Speaker 2

Our teams are packaging these programs to focus on significant unmet medical needs 8 that also alleviate the financial pressures on healthcare today. Maternity, EB discharge, 8 chronic disease and pre colonoscopy are just 4 of the many automated solutions with powerful outcomes eighteen included in these efforts. We also launched DoingWell, a series of client best practices webinars, 18, the first of which went live just a couple of weeks ago. The first of these features the CIO of Horizon Health Services. In the webinar, our client attest that Horizon Health 8.

Speaker 2

Reduced the average wait time for members' initial appointments from 5 days to 1. They also lowered by 40 days the wait for psychiatric services by their members. A growing list of these webinars can be found on our website. We plan to add content every month, Starting with compelling El Camino Hospital testimonial on May 17. Feel free to ask Sue for registration link if you would like to listen.

Speaker 2

These webinars 8, our valuable endorsements of our solution, which we believe will add to our growing momentum in the market. These examples are particularly important because we are finding that no two clients have the same hybrid care goals. 8. There is no cookie cutter solution for evolving to the new paradigm. Clients And increasingly, we believe they will choose to partner rather than build a homegrown solution 8 on which to deploy the right hybrid combination of virtual, automated and in person care.

Speaker 2

More broadly, across our industry, 18. It is increasingly clear to me that the market is taking note of our single, open and connected infrastructure platform. An example of this is the partnership we announced in Q1 with DarioHealth. We are pleased to add the Dario Cardiometabolic Health Program to our comprehensive portfolio of care solutions. The Dario solution addresses diabetes, high blood pressure and weight management needs 8 with a holistic highly individualized hybrid care experience.

Speaker 2

We have spoken before about the key benefit of converged architecture. It can embed third party solutions 18, much like an App Store. The value of this benefit is compounded because we already connect to so many payers, providers and patients. For example, innovators like Dario can look to us to accelerate their progress in the market, eighteen. Tapping into the potential that exists with our installed base of 2,000 or so hospitals and payers that reach more than 90,000,000 lives.

Speaker 2

Members and patients receiving care via commissions on our platform 18 can be referred seamlessly to a Dario program, minimizing roadblocks to accessible, 8 simple and efficient care, strengthening care continuity. And from our clients' point of view, 18. Accessing Dario through AmWell assists with vendor consolidation goals, streamlines reporting 18 and accelerates adoption and utilization of new innovative tools. To summarize, hybrid care delivery is rapidly becoming the main highway eighteen for a variety of care modalities offered by all types of providers and services, but the path forward is complex. With our unique combination of technology, services and client experience, 18.

Speaker 2

We believe AmWell is ideally suited to be the one stop shop where our clients can access the benefits 18 of the digital care transformation. No matter the timeframe or pain point our clients are looking to solve for, Our platform is purpose built and future ready, funded on years of investing and understanding the needs of our clients. In Q1, we made progress towards all of our strategic initiatives. As we migrate our customers, deliver on converge and the market response, we are solidifying our role as a digital transformation partner 18. And we believe we are just getting started.

Speaker 2

With that, I would like to turn the call over to Bob to review our Q1 financials, some key metrics and our guidance. Bob?

Speaker 3

Thank you, Ito, and hello, everyone. I'll start with a review of our operating metrics and then turn to financial results for the quarter. Active providers continues to be an important indicator of the sustained value our clients see in our platform. We ended the Q1 with 108,000 active providers, representing growth of 8% compared to a year ago. Driving this growth was active providers employed by our clients, which also grew 8% in the same period.

Speaker 3

We anticipate that our number of active providers will continue to increase as we migrate existing and implement new clients onto our converge platform. Total visits were approximately $1,700,000 in the Q1, a decrease of 4% compared to last year's COVID driven 1st quarter, So they were approximately flat to 4Q 2022. Scheduled visits increased 9% versus last quarter and represented 68% of total visits, Approximately 30% pre COVID. We continue to make steady progress migrating our clients to the new platform And we are proceeding according to our plan. In Q1, successful migrations drove visits on converge from 28% last quarter to 36% at quarter end.

Speaker 3

As we look toward the remainder of this year, we intend to complete migrations for the majority of our health system customers. 8. As Ito said, payer migrations have begun and we expect to see a large portion of those visits transition to converge early next year. 18. And now on to our financial results.

Speaker 3

Total revenue was $64,000,000 for the quarter, approximately flat to Q1 of last year $15,000,000 lower than last quarter. The bulk of this decline was accounted for by lower professional services revenue compared to Q4, 8, which was very busy as we implemented strategic clients onto Converge. Subscription revenue was $28,700,000 in Q1, 18. In Q4 accounted for most of this decline and was already incorporated into our revenue guidance for the year. As we have discussed, we expect subscription revenue growth in the first half of twenty twenty three to be impacted by the softness in bookings we experienced last year, Trended 6% higher than last year and was $32,500,000 AMG visits grew 9% versus 1Q 2022.

Speaker 3

Average revenue per visit was $3 lower at $75 due to a higher mix of urgent care visits, which is typical for this time of year. The continuation of an unusually heavy flu season that began in 4Q 2022 drove urgent care volumes higher and hence revenue per visit was lower for the quarter. Our services and CarePoint's revenue was $2,800,000 for the quarter. This represents a decline of $2,000,000 from the same quarter last year. These revenues are lumpy from quarter to quarter due to customer buying patterns for CarePoints as well as the timing of professional services revenues that precede deployments.

Speaker 3

We expect implementations for strategic clients 8 to drive a substantial increase next quarter in services and CarePoint's revenue. As we have discussed on prior calls, revenue of this type 20. Turning to profitability, our first quarter gross profit margin decreased to 39.5% from 42.8% last year. 8. Margins were negatively impacted this quarter by higher clinician onboarding costs in advance of new clients reaching run rate volumes.

Speaker 3

8. We also had higher professional services costs associated with customer migrations. Gross margins will vary from quarter to quarter on revenue mix 18, and we will drive toward higher gross margins as we move beyond this transition time and begin to increase subscription software as a percent of our revenue mix. Turning to operating expenses. Q1 R and D expense was $25,900,000 18 and was $32,700,000 after adjusting for capitalized software costs.

Speaker 3

This represents a 14% As we have discussed, we believe that 4Q 2022 represented our peak R and D spend. Given our progress in delivering CONVERGE, We expect that R and D will remain at this level through Q2 and decline again in the second half of the year, 8 and we'll exit the year at a run rate meaningfully below the peak. Sales and marketing eighteen. Adjusted EBITDA for the quarter was negative $44,600,000 which was in line with our plan. Also in the Q1, we recorded a $330,000,000 non cash goodwill impairment charge.

Speaker 3

18. This charge resulted from the sustained decline in our share price and associated market capitalization compared to the book value of our equity as of quarter end. Transitioning to the balance sheet, we ended the quarter with $507,000,000 of cash and marketable securities. 18. We are fortunate to have a substantial cash position as it provides the resources to fund this temporary period of investing and the flexibility to pursue strategic opportunities that are aligned with our goals.

Speaker 3

Turning now to our 2023 outlook, I would like to take this opportunity to reiterate our guidance range of $275,000,000 to $285,000,000 in revenue for the year twenty-twenty eighteen established on our February earnings call. We are also on track to achieve our adjusted EBITDA guidance for the full year 2023. As such, we expect our adjusted EBITDA to be in the previously highlighted range of negative $150,000,000 to negative $160,000,000 18. We assumed AMG visits of between $1,450,000 $1,650,000 in formulating this guidance. Wrapping up, we are encouraged by our progress to date.

Speaker 3

Our key metrics are trending favorably and we have 8. We have earned the validation of important anchor clients who have selected to partner with us and evolve their care delivery strategies on Converge. 8. The clients we have implemented onto Converge report a very high level of patient and provider satisfaction and technical success, 18. And they gave us valuable referenceability with our prospects.

Speaker 3

And we are busy in the market with important customer facing events and at reaccelerating our market momentum. Thank you for listening. With that, I'd like to turn the call back to Ito for some closing remarks. Ito?

Speaker 2

Thank you, Bob. In closing, I'm proud of the work our team completed in Q1. We are driven every day to enable our clients to achieve our company goals and pursue our mission. While there remain broader environmental uncertainty in our world today, the market for our solution is large, 18. Our role is unique and differentiated and the opportunity before us has never been brighter.

Speaker 2

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. 18.

Operator

Eighteen. Your first question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is open.

Speaker 4

18. Yes. Thank you. You had some encouraging comments on converged bookings. I was hoping you could maybe frame just how you're thinking about The timing elements of bookings you'll see this year and then what that means for any type of inflection for 2024 revenue growth on Converge.

Speaker 2

Experiences, robustness, scale, performance and most importantly, ROI examples, some of which I talked about in my prepared remarks, 18 that are all fueling our reaccelerated bookings. It's important to note also that the new platform, Converge, twenty is much bigger and has much broader opportunities for clients to leverage as they realize their business goal. Accelerate gradually and the momentum will grow over time more and more as more proof points are being delivered. 18. However, the trajectory and the direction is very apparent.

Speaker 2

And as I mentioned earlier, we are very optimistic 8 about our ability to continue to play a dominant role in this market. Bob, I don't know if you have anything further to add.

Speaker 3

Yes. I would just add, Ito, that Craig, our implementation timeline from 8 bookings to go live really depends on the complexity of the implementation, the client, but 18. I guess assumptions around 6 to 7 months are on average probably reasonable. And so 18. As you think about when revenue starts to show up from a new customer contract, 8.

Speaker 3

It's that kind of timeframe.

Speaker 4

Okay. And then maybe just switching gears, when I think about the increasing need to address mental health, 18. Was looking for an update on kind of what you're seeing in the silva cloud business on that front.

Speaker 2

I believe you asked, Craig. I agree with you completely that Beavra Health is a very urgent need in the marketplace. 18. And indeed, our ability to offer comprehensive elements that relate to behavioral health to the whole person independently and together with other Programs and Care Intervention is really key to the value that we generate. Your question really relates to a time where we had Maybe 30 or 35 different products that were running in parallel, we tracked them separately.

Speaker 2

It is so refreshing and Exciting to see that we really have one product and that's the converged platform today and the different components are intertwined Into this one platform where behavioral health is still a very dominant element, but we don't look at it separately and we don't report it Separately. It's really one set of a total person improvement that we offer to our customers.

Speaker 5

18. Thank you.

Operator

Your next question comes from the line of Alan Lutz with Bank of America. Your line is open.

Speaker 6

Thanks for taking the questions. Ito, one for you. You mentioned a lot of nice wins during the quarter. I 18. I just want to get an update on the macro here.

Speaker 6

As you kind of think about where the macro environment was 3 to 6 months ago, where it is now and then kind of where 8. It's going to go for the rest of the year. Is what's embedded in the guide? Is there an expectation that the 20. Macro environment improves at all over the course of the year in order to hit that or stays the same?

Speaker 6

Just trying to understand kind of what's embedded in the guidance. Thanks.

Speaker 2

So Alan, we see what you probably and many other people on the call see. There is great uncertainty in the marketplace 18. And that, of course, touches everyone. There is a slight improvement in the sentiment of health systems in the past few months and Maybe a little bit more cautiousness in health plans, but overall, the sentiment is very much what it was before. 18.

Speaker 2

What we see, however, that there is great respectivity to our offering today for two reasons. A, 18. Our clients understand that hybrid care enablement is really necessary for them as an infrastructure, both short term and long term. And they are also very encouraged by our ability to show ROI very, very quickly and I gave quite a few examples 18 in my prepared remarks. Overall, we believe that our guidance that we are reiterating today is realistic and reflect well both the short term and mid term headwinds and tailwinds that relate to the combination of our offering and some of the hardships That our clients are experiencing in the marketplace.

Speaker 6

That's great. And then one for Bob. 8. You mentioned R and D. It sounded like 1Q and 2Q will be at about the same level.

Speaker 6

And then it sounded like there might be another some type of step down in 3Q. Just want to verify that, that is correct. And then is it fair to assume the CAT software that you guys reported in 1Q is the right run rate for the rest of the year? Thanks.

Speaker 3

18. Thanks, Alan. You got it right that we expect Q2 to be a lot like 8th quarter in terms of the R and D spend, and then another step down in the back half of the year. 18. The CAP software probably is about the same next quarter.

Speaker 3

18. I would say a little bit less visibility on the back half of the year. 18. So the I would expect that we definitely see around the same level next quarter. Q3 could be a good bit less and it kind of just trail off.

Speaker 3

So I wouldn't assume that it's Just kind of at this level for the rest of the year. It would definitely be lower in the second half. I'm just it's hard to forecast exactly how much lower.

Speaker 6

18. Got it. Thank you.

Operator

Your next question comes from the line of Charles Rhyee with TD Cowen. Your line is open.

Speaker 7

Hi. This is Lucas on for Charles. Last quarter, you guys noted that the revenue guidance was primarily of bookings and implementations that you had a high degree of confidence that you'd see convert to revenue. Given that you reiterated your revenue guide, Has anything changed with those underlying assumptions that you laid out with at 4Q?

Speaker 3

No, I think the assumption I mean, it was a few weeks ago. The assumption Behind the guide are still the ones that are influencing how we're looking at the year. 20. And so I would say no change regarding that.

Operator

18. Your next question comes from the line of Jack Wallace with Guggenheim. Your line is open.

Speaker 8

Hey, thanks for taking my questions. A couple of regards to the billings, and I just want to make sure that

Speaker 2

8. I've got this understood correctly.

Speaker 8

The it sounds like there's a 6 to 7 month lag from booking a client to then booking revenue. When you book a client, when do you bill them in that timeframe? Is it right before revenue rec or is it a little bit beforehand?

Speaker 3

Usually, it's at the beginning at Golar, we will bill them.

Speaker 8

Got it. Thank you. And then it looks like there was a pretty big step up quarter over quarter in your calculated billings this quarter. 18. Could you just help us better understand how much of that was of you've heard of put it in 3 buckets, upselling, customers that have 8.

Speaker 8

Migrated to converge, higher utilization, new triggers and contracts and then new customers, because it sounds like there's a couple of those in the quarter as well.

Speaker 3

Well, tough to I would have to go through 18. The customer by customer there, Jack, and come up with the bucketing, but because I don't have that at my fingertips. But There is a mix of new customers in our billings for the quarter 18 and also upsells. The migration doesn't really result in any new revenue. 8.

Speaker 3

So they would be on the same billing cycle that they were on before. So it's really it would be to the degree there 18. Changes positively its new customers and upsells.

Speaker 8

Thank you. That's really helpful. And then kind of lastly, Is there been any change to the expected level of customization that has taken place during the existing and anticipated go lives Our migrations.

Speaker 2

Well, Jack, it really varies. There is no question that our strategic 8. And some of them are quite known like CVS and others are doing enormous lot on our platform that requires a lot of heavy integration and customization because they do so much, others are simpler. 18. So I think we see the full spectrum.

Speaker 2

It's important to note that those customizations are paid for and are Definitely accretive to the company. So we expect to see more of them as the level of sophistication in general 20. In the market is expanding. In a nutshell, telehealth 3 years ago cannot be compared 2 Hybrid Care Enablement that we see in the marketplace today. It's just a very, very different offering with very, very different level of commitment 18, both on Amul's side and the client side.

Operator

Your next question comes from the line of Ryan MacDonald with Needham. Your line is open.

Speaker 9

Hey, this is Matt Shea on for Ryan.

Speaker 8

I appreciate you taking the question.

Speaker 9

Wanted to follow-up on the large expansion with the multistate Blue Cross Blue Shield It sounds like they chose to expand you guys beyond telehealth and also Converge helped drive some vendor consolidation. So wondering if you could just share What some of those features beyond telehealth were? And then is there any way to think about how many vendors that ConvergeOne platform can replace or What value you guys bring to these health plans that incumbents maybe weren't bringing prior?

Speaker 2

Sure. So Matt, while I cannot talk about specific clients in general, almost most of our Payers and all the new ones are very interested in implementing a digital first infrastructure for hybrid care, 8, which means that they expect their own digital door and Santamado digital doors to enable their members to go online first 8. And then use the platform to get matched with an array of physical interventions, doctor visits, labs, imaging, Virtual services of different kinds and growingly automated program all working in harmony. 8. The client that we mentioned is no exception to that.

Speaker 2

The biggest value proposition of converge is not the fact that it checks all the boxes, Although it can check quite a lot of the boxes independently, but rather it's integrated modularity. Eighteen. So whether it's the user interface, the U. S. Or the different components, digital and otherwise services and data that we basically connect to create coherent, reproducible experience.

Speaker 2

So in many cases, we don't ask our clients to shutdown or terminate different relationships they have or different programs, but rather create a joint vehicle to create consistency, reproducibility In coherence and simplicity in the experience that all those interventions combine in the aggregate. 18. It's very possible that over time, our clients will prefer working with solutions that come integrated out of the box with relationships that we already announced and some that we will announce in the future just to really reduce the number of vendors that they have And to guarantee a very streamlined experience.

Speaker 9

Got it. Appreciate that. And then 20. Following up on the macro, in the past you've called out churn occurring at the lower end of the market with some of your SMB clients. 8.

Speaker 9

Do you still see churn contained to that part of the market? And then you've also noted that some of those that have churned also have come back. How has that trended?

Speaker 2

So we are going through a very critical life cycle event in our company, which is very public, which is the replatforming. 8. When you replatform, your legacy platform is hard to sell. Even the platform takes time to get ready and churn is really part of life. 18.

Speaker 2

We did take that into account in our guidance. We fully expected it. Virtually, all our strategic large clients 18. Remain with us for this transition, something we are very, very proud of. Also because we believe that simpler clients that just couldn't care to wait and there were good offers in affordable price in the marketplace.

Speaker 2

8. Our ability to win depends on the mission and the business goals of our customers. 18. If your only goal is to offer video visits between two points, there are plenty of very good 20 solutions in the market. Our competitive advantage there is minimal and it's mostly relevant if you have plans for the future 8 to further expand.

Speaker 2

However, if you have retail stores and PBMs and membership and many other elements 18. We want to bring all this complexity together into a cohesive infrastructure. We are really 18. Very good, Ed. And of course, the market is in the middle.

Speaker 2

We believe that as we are now looking at the mid-twenty 23 timeframe, where we pretty much have all virtually all the components that we need. There are always potential for more, but 8. All the relevant components that most of the people need most of the time, we will see much less churn really across The Board and definitely plan to strengthen and expand our midsized and large customers eighteen. For enabling their own mission, which totally aligns with ours.

Operator

Your next question comes from the line of Jalendra Singh Witurist. Your line is open.

Speaker 10

Hi. This is Jayanka Doolendra. Can you talk more specifically about the customer renewal trends you have been seeing from both the health systems and health plan side as these contracts are coming up for renewal. How are these conversations evolving? Are you seeing some of your customers willing to restructure the snapshot in some ways or is it still more or less status quo on the approach?

Speaker 2

So again, we have different customers with different 18. The is different from our legacy product. You really buy one platform. But it's very normal for our customers 8. To start with what they do today, they really want a smooth transition to in parity to check the boxes they're already checking, 8.

Speaker 2

But it's not uncommon, as I mentioned on the call, to see them adding some components with good emphasis on automation. So our longitudinal automated program 18. Usually quite popular as they come to renew and expand. So far, we are very encouraged by what we 18. Renewals and client retention.

Speaker 2

The most well known one, the famous one is Elavent, 18, a very important partner for Amwell that made that and we announced it, I think, on our last 8 call and made the decision solely related to converge. There are quite other large clients that really are doing the same thing. 18. However, it's already quite clear that once people migrate, the first thing we see is a nice bump in volume, 18, which is quite impressive versus the past. That's maybe one of the immediate benefits of the platform 18.

Speaker 2

That gives us a really good talking ground to begin to expand the client to the many other options of the converge.

Operator

Your next question comes from the line of Glen Santangelo with Jefferies. Your line is open.

Speaker 11

Yes. 18. Yes. Thanks for taking my question. I just had 2 quick ones.

Speaker 11

I wanted to talk about the progression of revenue growth here over the 18. If you look at last year in your services and CarePoint's revenue, you obviously saw a big ramp as the year progressed. And 18. We see the big sequential step down in revenues this quarter from last quarter, which is obviously largely services and CarePoint's revenue. And I'm Kind of curious, do you expect to see the same type of ramp on that line item this year versus last year?

Speaker 11

And I just had a follow-up question on the margins.

Speaker 3

Hey, Glenn. It's Bob. I in my prepared remarks, I tried to signal that we expected to see a pretty Meaningful increase in our services and CarePoint's revenue next quarter. And it's really I don't think it's like a gradual build Throughout the year kind of thing that is driving this. It really is strategic client driven.

Speaker 3

They want us to work with them on a custom Product or implementation. We do that and we get paid for it based on or we recognize the revenue based on when 8. Those hours are spent. Happened to be last year, it increased over the course of the year, Probably will this year too, but it's really again a function of when those clients come in with those kinds of requests. 18.

Speaker 3

It was unusually low this quarter, and I think it will be kind of back on a like kind of in a If you look historically more of a normalized level next quarter.

Speaker 11

That's helpful, Bob. Maybe I can just ask you one more quick one on the gross margin. 18. We obviously saw the gross margins tick down this quarter. And in your prepared remarks, you said maybe higher clinician on boarding maybe 8.

Speaker 11

Assuming you've been migrating customers to converge for a number of quarters now and 18. We saw, for example, in 4Q, the gross margin was up nicely versus 3Q last year and was 8. It was somewhat more consistent last year, so it just seems a little bit odd that the gross margin ticks down this quarter. And the reason I ask is because I'm trying to think about 18. In your EBITDA guidance, you're assuming some leverage throughout the year.

Speaker 11

And I'm trying to understand where that leverage is going to come from because and 18. And I think you highlighted R and D is going to step down, but any other clues to help us think about where that EBITDA leverage comes from in the back half of the year?

Speaker 3

Yes. I think a lot of the step down I mean the services revenues, Glenn, 20. Our generally higher margin than the overall margin of the company right now. If you think about our visit businesses 20 mid maybe a little bit better than mid-20s gross margin. And then our services I'm sorry, Our subscription business, high 60%, 70% right now.

Speaker 3

The services 18 revenue that's kind of the strategic implementation work is accretive to that gross margin. 18. And so when you have a big quarter like we did in the Q4 and then a big step down In the Q1, that's certainly going to influence gross margins. And then to get to your 8. The other components of your question, it was really specific ramp up with a 18.

Speaker 3

It's in our site business and they take time to build 18. And that's obviously very high revenue per visit type business. So we have to get those in place for our SLAs before Our customers are going to be in a position to ramp up those visits. So that's the other thing. And then on the migration, the other thing that influenced the quarter from a gross margin perspective was a lot more migration work than the year ago quarter.

Speaker 3

18. And that's obviously good news as we get that get more and more of our visit traffic on to converge. 20. The leverage on the EBITDA side is going to be associated with probably 18. A lot of those different line items, certainly subscription revenue with very high margin flow through there.

Speaker 3

18. And then again, on the services side, that will also be accretive to gross margin. 18. But that's kind of over the course of the year and you did mention already the step down in R and D, 18. Which from a 4th from an exit rate in the in 2022 to what we expect to exit 2023.

Speaker 3

It really is a pretty material step down. That's not a gross margin impact, but more of an EBITDA leverage impact. 18. But we're down 14%, 15% now quarter over quarter. We could see another 10 points of decline 18.

Speaker 3

In the difference between Q4 last year and Q4 this year 20 as that converge spending really comes down.

Operator

Your next question comes from the line of Stan Bernstein with Wells Fargo. Your line is open.

Speaker 12

Hi. Thanks for taking my questions. Ito, I think a few quarters ago you had commented That your sales reps are all hands on deck to help drive migrations. So it was nice to see you're announcing some marquee wins here. 20.

Speaker 12

My question is, in light of these new wins, has there been any change in your go to market strategy? Are you perhaps more focused on driving new wins than you were a few quarters ago?

Speaker 2

Thanks. Hi, Stan. Absolutely, yes. So if you think the change in our product was small, What's happening significant, I'm sorry, what's happening in SG and A is just as significant. I mentioned earlier in our 8.

Speaker 2

We are moving to solution based sales. Because Converge can offer so much business impact to our customers, Our entire client facing organization from sales, account management, customer success and a newly found solution group, which is Almost entirely based on engineers are working together to really create a consultative model of sale With our existing and new customers, we present a very long list of business solutions 18. That they can choose from and prioritize. We really understand their own priorities, go back and we are able because of the modularity of converge To really custom create something that fits very well to what they need today with giving them a peace of mind that we can be there for them as they expand in the future. And that's proving to be quite effective tool To help people migrate, to help the migrated client expand and to land some new customers.

Speaker 2

18. So we are very pleased with the change. We think we can add more value and we think that our value is much more sticky and long term with our existing new customers.

Speaker 6

18. Thanks.

Operator

Your next question comes from the line of Jonathan Young with Credit Suisse. Your line is open.

Speaker 5

18. Hi, thanks for taking the question. Just going back to the macro again, I guess when you think about some of the consolidation either in the health system or the health plan space, 8. How do you see this impacting your business? And are you seeing any impact right now given some of the announcements that have come over the last few months?

Speaker 5

18. And if you go back historically, could you speak to any historical trends you may have experienced in prior periods of consolidation? Thanks.

Speaker 2

So in essence, you see consolidation in many places, of course. You see delivery network consolidate, you 18. Payers and providers consolidate and really there are many, many models. When you consolidate, 8. You really want to work through some complex challenges in way of experience integration for providers and patients, 8 data integration, workflow integration to create common efficiencies and things of that nature.

Speaker 2

18. And that's exactly where we signed. When you think about value based care is an example of either formal consolidation or tighter collaboration between sponsors, payers and providers. Our ability to have one tech stack, one technology that can really create a very powerful bridge between them is proving to be fairly effective for them to realize those goals. So I'll give you some examples, if there is a consolidation between twenty few hospitals that have different EMRs and different workflows.

Speaker 2

Our ability to really implement converged in all those EHRs 18. And to create a consistent patient facing infrastructure and then embed fairly sophisticated workflow It's a very efficient way to really accelerate the value of this consolidation. Products, so people like Optum or Elephant in areas of second opinion and others is yet another example 18 partnership that are not again official consolidation, but are demonstrative of more and more integration 8 of experiences and that's really our business in a nutshell.

Operator

Your final question today comes from the line of Eric Percher with Nephron. Your line is open.

Speaker 5

Thank you. A little bit different tact. I'm curious to hear 18. A little bit more of where relationships with Dario could go specifically, 18. Are there other categories that you'd like to see similar relationships?

Speaker 5

And then looking at the balance sheet, are there acquisitions that you would undertake, recognizing that it seems the market is starting to reflect 8, a more realistic view of valuation and you're seeing a few deals get done. What's your perspective there?

Speaker 2

Hi, Eric. Well, we are very pleased with converge. We have all the components 18. We think we need and we don't see any unmet need that would drive a necessity to do any type of M and A. 18.

Speaker 2

As a reminder, we look ourselves as a connecting platform and not basically bringing all the solutions ourselves, 8. But doing it in a way of partnerships, very much like an operating system. And in App and the Dario, as you mentioned, is a great example. 18. We even believe that there is room for more than 1 player in the same field and we would like to integrate to as many as possible and basically let our customers Choose between reliable solutions that are fully integrated and certified by us.

Speaker 2

18. So in that way, we don't see any compelling need. If we would do a theoretical M and A, It will be in an asset that is likely to be technological that will make our the core mission of our platform better. 18. And as I mentioned, there's no really a short term or mid term plan for that.

Speaker 2

In addition to that, I'd like to say that we really appreciate the fact that we have very strong cash position. 8. The world is a dangerous place and we want to make sure that we buffer that risk with a strong balance sheet and the fact that we have no debt 8 on our books that allows us great conviction in our ability to realize our business line. 8. In addition to that, we are very sensitive to diluting our shareholders and are cognizant of our stock price today, and we will be very careful 20 before we suggest any move that could increase dilution.

Speaker 2

Of course, if some of those things change, if the market stabilizes, 8. Our stock hopefully recovers and we continue, we will maybe leverage some of the proactive 8 effort that we make to monitor the market, which we do all the time regardless of what I just said and act on some of those opportunity, But that would be down the road and not in the foreseeable future.

Operator

This concludes our Q and A for today. I now turn the call back to Doctor. Schoenberg for closing remarks.

Speaker 2

18. Well, thank you, everyone. Thank you for listening and thank you for your support of Amoil.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
American Well Q1 2023
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