American Well Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 10 speakers on the call.

Operator

afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the AmWell Q1 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

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

Speaker 1

Hello, everyone. Welcome to Amwell's conference call to discuss our 1st fiscal quarter of 2024. This is Sue Dooley of Amwell Investor Relations. And joining me today are Amoil's Chairman and CEO, Doctor. Ito Schoenberg and Bob Shepherdsen, our CFO.

Speaker 1

Earlier today, we distributed a press release detailing our announcement. Our earnings release is posted on our website at investor. Amwild.com and is also available through normal news sources. This conference call is being webcast live on the IR page of our website, where a replay will be archived. Before we begin our prepared remarks, I'd like to take this opportunity to remind you that during the course of the call, we will make forward looking statements regarding projected operating results and anticipated market opportunities.

Speaker 1

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

Speaker 2

Thank you, Sue, and hello, everyone. I'm pleased to report that Q1 was a busy quarter for our company, one that provided a strong start for an important year for us. As a reminder, on our last call, we shared our guidance for a step function in our growth that will help us achieve our profitability goal in 2026. Before I share some highlights on our Q1, I would like to open with a few general comments. It is now clear that the need for digital care enablement is significant.

Speaker 2

It is also clear that converged is performing well and powers sophisticated solutions across diversified clients on a large scale. And finally, it is evident that new large customers are recognizing the value of our platform as reflected by the size and revenue mix of our recent wins. Importantly, as we deploy our offering in the government sector, modernizing the military health system, we also expand into a new sizable market. In addition, we believe that implementing our platform in the demanding government environment is demonstrating important proof points that are also relevant in our existing commercial markets. Those include scale, versatility and cybersecurity capabilities that will shine a spotlight on our market differentiation across all our segments.

Speaker 2

During the past 3 months, we have taken major steps to adapt and transform our organization that will result in a greatly reduced cost structure as reflected in our forward guidance. In addition, we have good visibility into strong top line growth in 2025 coupled with greatly improved margins. The guidance we gave on our last call describes a 30% jump in our 2025 top line, rich with subscription software that will drive gross margin expansion to over 50%. We believe this is a clear indication of the completion of our replatforming investment period. We believe our technology offering is unique and will continue to drive favorable high margin software revenue mix, and our strong balance sheet fuels us well beyond our needs to achieve profitability.

Speaker 2

We are proud of our many clients, big and smaller, that are now committed to and utilizing Converge as their platform. Converge connects their healthcare services with millions of healthcare consumers. It drives efficiencies and fuels new revenue opportunities for them on a foundation of very high user satisfaction scores and NPS ratings. The market for digital health is just starting and we are well positioned to benefit. What we do isn't complicated.

Speaker 2

The value to patients, providers and payers is significant and we believe our deep integrations and vast deployments form long term bonds with health organizations that make up a big part of the U. S. Ecosystem. We are proud of what we have accomplished in the past 3 years and believe it is beginning to pay off. And now I would like to review some highlights from Q1.

Speaker 2

1st, we are delivering for our clients. In addition to the successful go lives and migrations we completed this quarter for several clients, we are steadily completing critical milestones as we deploy our solution for the military health system working alongside the latest partnership for Defense Health. Following our successful rollout of our digital behavioral health solution in Q1, we are now targeting the next capability offering go live for Q3. Our efforts are on schedule and we look forward to supporting the MHS in the full enterprise deployment of our solution scheduled for Q4. Interest in the work we're doing together with the DHA is growing.

Speaker 2

Earlier in Q1, in its health. Mil website, the DHA also announced its launch of our digital behavioral health solutions at the beginning of this journey. Also recently an article for Modern Healthcare described the DHS commitment to modernization with our offering at its core. 2nd, we solidified important initiatives in our growth organization aimed at reaccelerating our bookings and increasing our mix of subscription software revenue. Our growth org is embracing the changes we have put in place and tonight I will share an example of our booking success.

Speaker 2

3rd, we continue to drive for efficiency. We are optimizing our company by instituting a cost structure that provides a baseline for meaningful profit expansion as our growth scales. In a very active Q1, we successfully migrated a large portion of our visit volume on to our converged platform via some of the most strategic payer migrations, including previously announced, Eleventh and Highmark. Visits on converged were nearly 70% in Q1, meaningfully higher than 54% in Q4. Our platform is scaling and performing well and client feedback remains strong with fans operating consistently well over 90%.

Speaker 2

And now I would like to provide some color around the successful Q1 client expansion demonstrating the growth potential within our existing client base. With a sizable expansion with an existing East Coast Blue Pair client that will deploy several of our automated programs to drive engagement, reduce costs and compete for members in a crowded regional market for health insurance. Leveraging our programs, this payer intends to identify high risk members and proactively encourage them to engage with high value care programs like diabetes management. We also had a good quarter for client renewals, including Highmark, Intermountain, El Camino Health, Penn State and Cleveland Clinic. Concluding my discussions on our growth initiatives, we think we have the right team structure in place and engagement with existing and prospective clients is high.

Speaker 2

We've completed detailed client reviews and creating rigorous account plans with metrics and compensation plans that emphasize a high value ROI selling approach and a focus on selling subscription software. Our new organization embracing a robust enterprise selling motion that we believe will accelerate our growth fueled by demand for our hybrid care expertise and a differentiated approach enabling hybrid care delivery across the healthcare landscape. Based on these achievements, we continue into 2024 with high conviction regarding our guidance for meaningful growth next year and our plan to achieve profitability in 2026. With that, I would like to turn the call over to Bob to review our financials and key metrics and our guidance. Bob?

Speaker 3

Thanks, Ito, and good evening to everybody on the call. We ended the Q1 in a position of continued strong visibility into our future growth and our path to adjusted EBITDA breakeven. Tonight, I will walk you through a few operating metrics and financial results from the Q1, then I will review our guidance for 2024 as well as our expectations for 20252026. To begin, total visits were approximately 1,670,000 in the first quarter, a small decline versus 1,700,000 last year. Visit volume this quarter was negatively impacted by 2 one time events.

Speaker 3

First, the change healthcare security breach and second, a temporary disruption associated with our largest client migrations to converge to date. We resolved those issues before quarter end. Scheduled visits represented 63% of total, continuing to highlight the evolution of our company from providing virtual urgent care to a platform provider enabling hybrid care. We continue to make good progress migrating our clients to Converge. As we announced in February, we successfully migrated some of our largest payer clients and we saw volume from them ramp this quarter.

Speaker 3

With their volume now migrated, the percentage of visits on Converge is materially higher than the 52% from last quarter and for 1Q was over 68%. Turning to our Q1 financials. Total revenue was $59,500,000 for the quarter, down $4,500,000 or 7% from a year ago. Approximately $4,000,000 of the decline in revenue versus last year was subscription related, driven primarily by legacy platform declines with the balance driven by lower visit revenue, offset by higher services and CarePoints revenue. Subscription revenue declined 9% from Q4 and was $24,900,000 in Q1.

Speaker 3

We believe the Q1 was our low point for the year for subscription. We believe that subscription revenue will increase each quarter this year with contracted customer go lives, the full benefit of which we will see in the 4th quarter from a run rate perspective. We continue to expect our subscription revenue for 2024 to be approximately flat to 2023. AMG visit revenue trended 4% lower than last year and was $31,000,000 in Q1. AMG visits were 6% lower this quarter versus a year ago due in part to the one time dynamics I just mentioned.

Speaker 3

Average revenue per visit was slightly higher this quarter than last year at $77 driven by a mix shift within AMG away from on demand urgent care visits. Our AMG business continues to be strategically important to client expansions and new client wins. Our services and CarePoints revenue was $3,600,000 for the quarter, a decline of $7,700,000 from last quarter, driven primarily by the timing of professional services and marketing. These revenues are uneven from quarter to quarter due to customer buying patterns for marketing services programs and for CarePoints as well as the professional services milestones that precede deployments. We anticipate that our services and CarePoints revenue will represent approximately 10% of our total revenue for 2024, 2 thirds of which will be recognized in the second half of the year, driven primarily by go lives of contracted deployments.

Speaker 3

Turning to profitability. Our 4th quarter gross profit margin was 31%, a decline of approximately 300 basis points from last quarter. We view this decline as temporary and it was largely due to lower subscription software and services revenue combined with one time costs related to the very large payer migrations we completed this quarter. For the year, we expect our gross margin to approximate the levels we saw in 2023 and expand meaningfully in future years as our mix of subscription software increases. We are tracking well on our path to normalizing R and D spending.

Speaker 3

GAAP R and D expense was flat to last quarter and was 7% higher after adjusting for $3,000,000 of software development capitalization associated with our government work. Inclusive of this spend, software cap adjusted R and D spend is 10% lower than a year ago. We continue to expect our total R and D spend to decline at least mid teens percent this year versus 2023. Sales and marketing expense was $4,000,000 higher than 4Q 'twenty three, driven by severance and other costs associated with our growth transformation. We also had higher compensation accrual compared to last quarter, which was offset by lower salary expense due to our headcount reduction.

Speaker 3

Overall, we expect GAAP sales and marketing costs to be level year over year, inclusive of one time costs. G and A expense was $8,000,000 higher versus last quarter, driven primarily by higher compensation accruals plus higher stock based compensation expense due to the partial vesting of 20.24 grants. We expect our quarterly run rate for stock based comp for the remainder of 2024 to be below the level we achieved in the Q4 of last year. Adding it all together, adjusted EBITDA for the quarter was negative $45,700,000 versus negative $44,600,000 last year. Our gross profit contribution is lower by $7,000,000 driven by lower subscription software and one time migration expenses offset by lower R and D.

Speaker 3

Transitioning to the balance sheet, we ended the 4th quarter with $309,000,000 of cash and marketable securities. Turning to our outlook. Q1 represents a good start to our year, and tonight we are reiterating our 2024 guidance. We continue to expect revenue for 2024 to be in the range of $259,000,000 to $269,000,000 for the year. We expect subscription revenue to be roughly similar to that of 2023 and to grow incrementally each quarter this year with contracted go lives, the full impact of which will be evident in the Q4.

Speaker 3

As to adjusted EBITDA, we continue to expect our 2024 adjusted EBITDA to be in the range of negative $160,000,000 to negative 100 and $55,000,000 Additional context around our assumptions remains unchanged. We are on track to reduce our converge related R and D spend annually by 25% to 30%. However, government related customization of our platform will moderate the overall decline in R and D to a circa mid teens percent reduction for the year. Our headcount actions will result in over $15,000,000 in compensation related savings, though our guidance assumes we return to normal levels of incentive compensation versus 2023. The progress we have made in recent quarters significantly adds to our financial visibility and meaningfully de risks our path to adjusted EBITDA breakeven.

Speaker 3

The impact of our plan supporting the DHA, including the enterprise expansion, is not fully visible with a single year of guidance for 2024. And so in February, we took the extra step of providing a range of longer term financial expectations, the highlights of which are as follows. We expect revenue in 2025 to be in the range of $335,000,000 to $350,000,000 representing growth of circa 30% compared to 2024, primarily driven by go lives of contracted software backlog, including our planned enterprise wide DHA deployments. We further expect an approximate 70% improvement in our adjusted EBITDA to a range of negative $45,000,000 to negative $35,000,000 We expect the change in our revenue mix towards subscription software to lift gross margins from the high 30% area in 2024 to over 50% in 2025. After configuring our platform for operation in the government ecosystem, it will be fully scalable and ready to deliver complete hybrid care across the entire MHS enterprise with minimal future development required.

Speaker 3

And finally, rounding out our forward looking expectations, we currently expect to achieve adjusted EBITDA breakeven in 2026 with a cash investments balance of approximately $150,000,000 In conclusion, we are encouraged by the strides we have made in our business and in Q1 we made good progress toward our goals. We believe we are just beginning to capitalize on the opportunity in front of us and this guidance marks the early days for the long term profitable growth trajectory we envision. Thank you for listening. With that, I'll turn the call back to Ito for some closing remarks. Ito?

Speaker 2

Thank you, Bob. In closing, I would like to thank our teams for the work we completed in Q1. We are on track for our goals and we made progress towards our strategic initiatives. And as we deploy and migrate our customers and the market takes note of the benefits of the hybrid care we enable, we are solidifying our role as a digital transformation partner. We believe we're just getting started.

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. Thank you.

Operator

Your first question comes from Charles Rhyee with TD Cowen. Your line is open.

Speaker 4

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

Speaker 3

Ido, you're on mute.

Speaker 2

Sorry about that. Hi, Charles, and thank you for your question. The duration of our agreement did not change much. It's roughly around 3 years, give or take. The renewals are 1st and foremost, a vote of confidence in converge, virtually all the clients that renew are looking at the new platform.

Speaker 2

And each new client does look to add new elements to it. Of course, those elements and those solutions in addition to traditional virtual visits of on demand or scheduled vary from one client to another. I'll give you a few examples. Payers typically add and Elevance is a good example of that, add virtual primary care. We believe VPC is enormously valuable and has a lot of potential for growth, adding a lot of value to members and creating a lot of savings and impact clinical and financial to the sponsors.

Speaker 2

In addition to that, we see same store growth and certainly relevant for renewal in all the area of automated interactions. Automated interactions are very broad in their impact. They could be as simple as facilitating colonoscopy, all the way to managing complex illnesses like diabetes and others. And that's certainly something that we've seen and I gave at least one example of the Blue plan that's a new client actually. I'm sorry, that's an expansion, so that's very relevant to your question.

Speaker 2

Another example that we see now in renewals and expansions is virtual nursing. There is a very big shortage of staff in hospitals and the ability to add to the roster nurses that extend their career and could be very helpful in saving hours and hours of time in facilitating things like admissions and discharges is very significant to many of our customers. Lastly, last example and there are others, but we're short of time is the whole notion of collaborative care as it relates to behavioral health. Our ability to use single cloud technologies to help primary care providers drastically improve access to behavioral health services is something that many of our customers are very interested in. So in short, I believe that all of our renewals are really focusing on the broad capabilities of the Amul platform today, which is very different from our legacy offering.

Speaker 4

Appreciate all that detail. And you mentioned Elavance adding sort of virtual care. Just curious your thoughts here, the recent announcement of United with the Optum Virtual Care platform being kind of wound down here. I'm just curious your thoughts on what that says about the market here for virtual care and the role that payers play in that? Thanks.

Speaker 2

Sure. So as you know, United is a very old partner of Amul. We have very strong relationship that they take a really long time. Those relationships are strong and internal events within the United Group do not expect to have material impact on our relationship or is it impact on our guidance as to the specific case that you've mentioned. But certainly, we've seen and you're absolutely right, we've seen quite a few examples where tech oriented companies offered care and it was very challenging for them and quite a few exited this business.

Speaker 2

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

Speaker 2

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

Operator

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

Speaker 5

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

Speaker 2

Absolutely. And Bob can follow with some financial observations. But essentially, our relationship with the DHA and with the Leidos partnership on health is really terrific. They're very experienced. This is a very large project and it's going very well.

Speaker 2

We're going to really do everything we can to make sure that it continues to go away well. As I shared in the prepared remarks, the first milestone for the year is behind us. We went live with Behavioral Health, which according to the client preference was the most urgent thing for them to deploy. As I mentioned earlier, there are 2 more milestones, the deployment of CONVERGE, which we are focused on right now. And lastly, the deployment of automated care towards the end of the year with expected enterprise rollout at the end of the year.

Speaker 2

We believe this time line is still very realistic and very viable going forward. Any other comments, Bob?

Speaker 3

Yes. Craig, thanks for the question. I guess I would say, from a revenue perspective, you can expect to see the lion's share of the impact in the Q4 with a lot of that revenue coming on with go lives in the Q4. And for the 1st couple of quarters, Q2 and Q3, you're going to see a lot of services revenue come online. There's 2 components to the services revenue that we'll be recognizing as we go forward here on the customization of the platform.

Speaker 3

1 is tied recognizing the revenue is tied to go live. So there's that aspect that we won't see in the next two quarters, but then there's another leg of that that we will see and it will drive significant growth in our services and CarePoint's revenue in Q2 and Q3. So from a financial perspective, you'll see a few things going on. Revenues, highly 4th quarter focused there. Services revenue, you'll see come on in Q2 and Q3 in a meaningful way.

Speaker 3

Those will be our largest quarters from a revenue perspective in services and CarePoints. And then you'll also see in the second and third quarters as well. So I think financially, that's what you can expect as we as it relates to that the DHA work.

Speaker 5

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

Speaker 3

I feel like we've got it pretty programmatic at this point, Craig, in terms of as I think about the components, I think gross profit is going to rise very meaningfully over the next few quarters. So getting us back to about what we did last year on the cost of goods sold side and the resulting gross margin and then increasing to north of 50% the next year. So I don't see much concern around that. And then as we as I think about the operating expense line items, we have a very good beat on what the converge related spend and the declines there, continue to expect that's going to be in the area of 30% year over year and have a very good idea and a lot of comfort I think built into the what we're spending for customization in the government sector. So I don't I feel like we've been conservative in how we've estimated that and the mid teens decline reflects that level of conservatism and the contingencies built in for that work.

Speaker 3

And in SG and A, I think we've done we've taken some actions in January. I expect that we'll find incremental efficiencies going forward on the SG and A side. I think historically we've been talking about a lot of operating leverage there. I think there's we've got scope to actually take those costs down year over year. So I don't I think those are really the points I'd make.

Speaker 3

I don't know, Ito, if you had anything you wanted to add.

Speaker 2

Yes. Maybe giving you some color and from another angle. As Rob mentioned, the big event, of course, is the completion of converge. The platform is built and proven, and that allows us to really greatly reduce the R and D investment. In addition to that, we spent the last few months really focusing on efficiency and effectiveness in the company across the entire company with special focus around efficiency and effectiveness of our growth organization.

Speaker 2

So we together with 3rd party consultants and our own team, we took a fresh look on the market. A lot has changed in the market and that drove some very interesting opportunity as it relates to our strategy and the focus, redefined our TAM and SAM and chose to basically redefine also our business lines with special emphasis around the profitability. We used to we took the new market segments and we decided to focus on segments where we have the highest right to win and the best opportunity to generate a better gross margin, especially driven by several mix towards the subscription software subscription. We did change our entire growth organization. We built a whole new structure around sales operation to support the strategy that is fit for the current market condition, the competitors in converge.

Speaker 2

Our marketing that is really resonating right now with the market was revisited. We upskilled our talent. We brought some people from the outside in area that we needed to and trimmed on people that are less relevant to what we're doing. We trained the entire staff on the new plan and we created new comp plans that really are encouraging team to focus on high margin software subscriptions. And clearly, one of the outputs is that we have less quota carriers and the bag they are carrying is much broader.

Speaker 2

That's not only interesting financially and where the effectiveness, that means that these people are able to tell a story of a much more broad end to end solution that we believe the clients appreciate. We no longer have separation around business lines, but other consultants are able to talk about our entire portfolio. We no longer have hunters and farmers. We really have one team that is nurturing the relationship with both new customers and existing customers. So these are some examples on what happened in the past few months in Amoil.

Speaker 2

And the net of it is that we believe that we have already achieved much more focused and efficiency in our organization and we fully expect to continue those efforts over the next couple of quarter, which will be demonstrated also in our cost structure.

Operator

Your next question comes from Jessica Tassen with Piper Sandler. Please go ahead. Hi, guys. And thanks for the question. So I wanted to confirm first off the sequential growth you're guiding to from a subscription perspective that contemplates kind of known and understood attrition and is net of that attrition?

Speaker 3

Yes, that's correct.

Operator

Okay. Awesome. And so then my follow-up is just, I think you guys mentioned that the DHA has expanded in some respects into behavioral capabilities that were not part of the initial deployment. Can you just help us understand what's the scope of the initial deployment from a product perspective? And then what is this incremental behavioral business?

Operator

And my last one is just can you confirm that the DHA enterprise wide deployment is like locked and loaded, funded and poised to occur in the Q4 of the year? Thank you.

Speaker 2

Hi, Jessica. Good to hear your voice. So the behavioral health was always part of what the DHA wanted to deploy. In fact, their kickoff, the taking care of people initiatives is really focusing on behavioral health for our men and women in uniform. So that's why it was always the plan and indeed the plan was executed to start with the automated behavioral health, which we deployed.

Speaker 2

The product basically allows providers to prescribe different treatment plans that are highly automated, but with hybrid approach together with coaches around things like depression, anxiety, a long list of other ailments that are behavioral health specific. So we've done that. And if you remember, the initial year is about deploying the services in 5 demonstrative sites across the VHA. And once this is done and working well to go to an enterprise expansion. So this first milestone is deploying those services in the site of the DHA and we went live with it and it's operating.

Speaker 2

The other two milestones are the converge deployment that we're focused on right now. And the last one is the automated care opportunities that I mentioned earlier. All that is done complying with long list of requirements for cybersecurity, for our staff credentials, for the gov cloud operation and many other things. So we are really investing here in capabilities that would be very relevant across the government market and now also a very nice showcase that some of our commercial customers are looking at. As far as the contract in the budget, as a reminder, the $180,000,000 budget for this is part of the $4,000,000,000 task order vehicle for the DHA and all that was granted.

Speaker 2

This budget is both for the initial deployment that I mentioned, but also for the enterprise expansion that is planned to take place on the 4th quarter. While the clients, of course, have always the right to delay or stop anything that we are doing, We believe that so far everything that we are doing is going very well and generates much value. And there is no budgetary

Operator

Your next question comes from Jay Lendra Singh with Truett Securities. Please go ahead.

Speaker 6

Thank you and thanks for taking my questions. So I want to follow-up on your comment earlier about visit volumes being impacted by change healthcare and the temporary disruption from the large client migration. First, are you willing to quantify how much was the revenue impact on the quarter? And the second, did Change Healthcare impact in any ways decision making process at your potential prospective clients in terms of they were preoccupied with this problem dealing with change of the issue? And then on the client migration disruption, any other color you can provide what exactly happened?

Speaker 2

Sure. I'll give you Gilan or hi. I'll give you the details on what to place and then Bob can add his view on the impact to the extent that we can share. So essentially, I think what happened in change is evident to everybody. As it relates to us, when we went live with the likes of the Eleventh and Highmark, the experience was that consumers logged in and they were not able to continue with the visit because they were not able to see their co pay and really go forward.

Speaker 2

So we had lots of doctors waiting to see patients that couldn't go in and lots of patients that couldn't see their doctors. Obviously, that's a serious barrier. Our initial solution was to find alternatives to change. It took some time, but we pulled it through. And of course, after a while, change brought a solution and we're able to resume the service.

Speaker 2

Many, many participants in the ecosystem were affected by this. We certainly were not the only one. So I don't think that this has an impact. I don't remember any example of an impact on our pipeline or discussion with potential customers or with existing clients. Maybe a little bit in the reserve, the fact that we're able to recover from such a major challenge is somewhat of a plus in our reliability in the market.

Speaker 2

Generally, the migration itself was the largest migration we had in our history. It was very interesting because it took place at the beginning of the year, a time where access to providers is the hardest and demand is the highest. In addition to that, we also launched a new product with Elavrans, the virtual primary care that we had to staff. So there was really an interesting test test to all operations, both technical and the sale of building two way integration with a lot of clients' systems that were ramping up over time. And in addition to that, we had to manage a network that was in full capacity in very high demand.

Speaker 2

Pleased to report that we were able to execute and the system did go live and scale and is now in full production for both Highmark and Elevants. Bob, maybe you have some more comments.

Speaker 3

Julinder, we estimate that sorry. Julinder, we estimate that change had change not happened, we would have been flat from a visit perspective year over year. So that cost us the volume decline that we saw in the Q1 here. And so I think that was the question you asked. But absent that, we would have been at least flat.

Speaker 3

And then what Ito described about the migrations, that was also a one time event that cost us some volume, but that would have been the growth on top of being flat vis a vis the change issue.

Operator

Your next question comes from Ryan McDonald with Needham and Company. Please go ahead.

Speaker 7

Hey, this is Matt Shea on for Ryan. Thanks for taking the question. Just wanted to circle back on the Optum shuttering digital health as well as Walmart closing their digital health operations. Do you see this as creating a potential opportunity for Amwell to move more into the retail space or see kind of some greenfield opportunity that wasn't there before? And maybe kind of in conjunction with that, do these announcements change at all how CVS is thinking about their digital health program, either seeing more opportunity or anything to call out there?

Speaker 2

So Matt, these are really great questions. And of course, I cannot opine or share anything about specific clients of ours, but more generally. So zooming out for a second, do we believe that people will use digital care as an opportunity to act as the health care system? And I think that everybody agrees that the answer is very strong, yes. We don't think that, that trend is going anywhere.

Speaker 2

There is so much potential convenience, cost savings, improvement of outcome, access to higher quality care that is possible when you use a hybrid daycare. I think that some of the events that you mentioned demonstrate that this is really complicated and the solution is not very easy, not only for a single organization, but it really requires integration. The answer is not by having 1 hero do it all, but rather have a solution that is working across the ecosystem to build bridges and really combine in a hybrid way the solutions that exist. There is no substitute to the trusted brands or providers. There is no substitute for considerations.

Speaker 2

There is no substitute to reinvest in what would it actually take to allow patients and consumers to navigate through this very important complex set of options. So having said all that, we believe that we build an infrastructure that facilitates that connection and does not overlap with the traditional roles of traditional players that we believe continue to be theirs. Saying it another way, we believe that what we build is positioned very well to benefit from everything we said. Just to give an example, UnitedHealth Group was very vocal saying after what they announced that they are very committed to telehealth, to hybrid care. They definitely plan to continue and sponsor it and they said it to us, they said it to the world.

Speaker 2

So in many ways, my short answer to your long after the long detail is that we are here, we're still serving a big part of the U. S. Ecosystem. When there are going to be less players, the math is that we are likely to net benefit it. But we it's early days and we're not trying to suggest right now how quickly this trend is going to evolve from our vantage point.

Operator

Your next question comes from Stan Bernstein with Wells Fargo Securities. Please go ahead.

Speaker 8

Hi. Thanks for taking my questions. Ito, first, maybe just a follow-up on your comments regarding the go to market strategy. You mentioned there are some changes there. Can you maybe just expand specifically what are the changes?

Speaker 8

What are the focal points that are different versus historically? And maybe if you can also comment on how is your sales team now splitting their time between upselling existing clients versus going to market for new clients?

Speaker 2

Sure. So as I mentioned earlier, the market today is so different from a few years ago. Essentially, buyers want complete solutions. When you think about those solutions, it's helpful to, I think, talk about it in a way of what does what do patients want, what does what do consumers want. And we all want to go digital, go online, either proactively or reactively and have the richest set of options from trusted sources with a combination of in person, automated and virtual.

Speaker 2

In addition to that, providers are key to that solution. So providers want to have a solution that is very intuitive, very easy, that is fully embedded in their workflow, protects the licensure, allows them to get paid for the time in a fair way. And all those things are not very easy. And we believe Converge sold for it in a really comprehensive fashion. We also believe that the combination of our own network together with long list of partners that is getting longer by the day, like Cleveland Clinic and Indario and many others, allows us to offer the full gamut, not only urgent care, but also diabetes and hypertension and nutrition and GFP1 and telestroke and psychiatry and psychology and therapy and so on and so forth in a really efficient way.

Speaker 2

So you have trusted services from non brands across the full care continuum for an interface that is so unique that connects you to people that you trust. Having said all that, as it relates to the market demand, what I just said appeals to sub segments that we have defined and we just don't have the time to go through within the payer and provider community where this is the most compelling, where what we created has the best right to win. So together with our friends at McKinsey and others, we really map those out and make sure and package our products in the right way to address those needs. The teams that we built are no longer separated by product lines or by new logos and existing customers. Basically, the idea is that each pod of consultants is able to basically establish new relationship, but then continue this relationship and manage it to expand it or focus on existing relationship and just expand it.

Speaker 2

And the metric here is more relates to capacity rather than the type of people that do that. And that may sound like a small change, but it's actually a very profound change. Anyone that is facing our clients' number today knows that they are from the first interaction that they are going to own this relationship for many years. And that changed the dynamics both on our end, but very importantly for our customers.

Operator

Your next question comes from Diana Lee with Bank of America. Please go ahead. This is Hannah Lee on for Alan Lutz. Thanks for taking my question. So just over the past few months, have there been any changes with what you've been seeing in the spending environment and just overall macro pressures of health systems?

Operator

Would just love to hear your thoughts on recent customer trends and how much you expect growth in 2025 and 2026 come from either new customers versus expansion with these customers?

Speaker 2

Hi, Hanalee. Well, I think that the biggest change we've seen is maybe from 2 or 3 years ago to today. And we think that many of those changes are permanent. The what we've seen 1st and foremost is dramatic rise in sophistication of health systems. If telehealth was somewhat exciting and in some cases naive, today, hybrid care is a very effective tool that is known to do important things for health systems, to retain staff, to improve efficiency, to save time, to engage patients in a very meaningful way, to manage risk in any way, to name a few.

Speaker 2

So the RFPs that we see and the dialogue with health system, both existing customers and new ones is a very different dialogue than the one that we held only a couple of years ago. The ROI is really front and center to those dialogues. And it's no longer enough to talk about a broad platform. The The benefit of having converged today is that really it's already coming out of the door with very broad set of solutions, but it's very open to get new ones, not only from Amwell, but also from new partners and to also embed solutions that our clients bring to the table. And that's a really important attribute.

Speaker 2

So I would say that there is readiness to pay for clear ROI. The model that is preferred is a model of risk sharing whenever possible, but there is growing conviction that we see in making those payments. So in summary, we believe that if telehealth 2 or 3 years ago was a part of the innovation, differentiation, vision part of the health system, it's really much closer today to the operational mundane part of the infrastructure that has very clear goals and very clear ROI to be proven by the partner.

Operator

Your next question comes from David Larsen with BTIG. Please go ahead. Hi. This is Jenny Shen on for Dave Larson. Thanks for taking my question.

Operator

I just wanted to ask, you've mentioned in the past that 90% plus of the revenue increase that you need from 2024 to 2025 is associated with contracted go live or backlog. Can you give us some more color there? Any update just to have a better idea on concentration? How much of that is related to the DHA contract? And any additional comments you can give us in terms of visibility, how you're feeling with the longer term outlook for profitability by 20 26?

Operator

And any comments upon your good bookings, which you made some positive comments on earlier? Thanks.

Speaker 3

Yes, Jenny. We I think we gave really specific guidance back in February. Nothing's really changed there in terms of those statistics. The percentage of growth that's underpinned by contracted go lives still in that same zip code. And if anything, we have higher conviction around all that.

Speaker 3

So I don't really have anything incremental to share on that. And then as far as the path beyond that and to profitability, Again, I would say higher conviction as we've really dug in on our cost structure. We're going to show just independent of all of the goodness that we're going to see top line and gross profit. If you just look at where we were in 2023 from an operating expense perspective, we're going to be down high single digit this year and then we'll be down call it circa 25% from that level in 2025. So costs are coming out of the business very quickly.

Speaker 3

And again, on the revenue side and the mix side and the gross profit margin side, we continue to feel really good about the guidance we gave in February.

Operator

Our last question comes from Jack Wallace with Guggenheim Securities. Please go ahead.

Speaker 9

Hey, thanks and congrats on what looks to be an increasingly positive outlook here. Just a question on the provider business. For the providers that have migrated, have we seen any churn there? And I say that because my hunch is no. And if most of the providers have been migrated at this point, there shouldn't be much of a churn element in the subscription line going forward.

Speaker 9

Do I have that correct?

Speaker 2

We have many clients, but I'm not I think you're right, but I need to check all of them. Some of them are very small, so I don't want to mislead anyone over here on the call. But as a general rule, I don't recall any migrated customer that terminated or departed that I'm aware of, notwithstanding people that had some known market events that we cannot talk about. They are not connected necessarily to us at all. But as a whole in way over the market, people that migrated are very happy and are not going anywhere anytime soon as far as our vantage point is concerned.

Speaker 2

Bob, any color on that?

Speaker 3

No, I think that's right.

Speaker 2

Great. Thank you so much. You're welcome, Jeff.

Operator

There are no further questions at this time. I will now turn the call back to Mr. Ito Schoenberg for any closing remarks.

Speaker 2

Well, thank you, everyone. We really appreciate your support of Amwell and going through this enormous period of transformation. It was a long road, but we are excited that it's nearing the hard part and we're excited about what's to come. So thank you for joining us on this journey and thank you for joining us this evening.

Operator

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

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Earnings Conference Call
American Well Q1 2024
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