American Well Corporation Class A

Good day and thank you for standing by. Welcome to the AMWEL Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Ito Schoenberg, Chairman and CEO of Amel. Thank you. Please go ahead.

Good evening and thank you for joining our earnings call. On our call this evening, I will discuss our 2Q performance and share full year trends, including our 2021 guidance. I will then cover our strategic trajectory as reflected in our recent performance and acquisitions. Finally, I will turn to Keith. to give you more color on our financials, and then we will both open the call for Q&A. The second quarter remains consistent with our plan, with $60 million in revenues. Fifty-five percent came from our technology business and 45 from visits. We were excited to count over 70,000 active providers, significantly higher than we expected, considering 2020 COVID-related one-and-done adjustments. Following the typical seasonal pattern, as we ended the school year and headed into the summer, 1.3 million visits were performed on AMWEL platform in Q2 of 2021, versus 1.6 million the previous quarter. Clients continue to significantly leverage the AMWEL platform to deliver care to their patients, and 75% of all visits this quarter were performed by our clients' own providers. I'm pleased to report that Amwell drove a 600 basis point gross margin improvements to 44%. This was accomplished through a favorable shift to more higher margin technology revenues and a set of efficiency contributors that started to realize, including our migration to Google Cloud, Amwell Medical Group technology improvements, and initial deployments of Amwell Now on Converge. These efficiencies also improved our EBITDA loss to $23 million for the quarter. Our software subscriptions, CarePoint, and technology-related business continue to operate at or better than originally expected. However, the recent emergence of the Delta variant has introduced some uncertainty to our second-half visits outlook. To cover all these demand scenarios, we want to account for a new potential second half possibility in which the Delta variant preventive measures, including masking and social distancing, could significantly reduce the flu season while not adding to actual COVID-related demand. To cover such potential variant-related development, we are adjusting our full year range to 252 to 262 million. Given the earlier discussed efficiencies, we're improving our organic EBITDA guidance by $12 million to negative $154 to $146 million, which on a gap basis includes the $10 million EBITDA burden from the Conversa and SilverCloud acquisitions and the related deferred revenues write-offs. In Q2, we began to deploy Converge in hospitals and delivery networks. 38 Amwell Now clients are already live on Converge, powering 1,300 providers on our new platform. Patient satisfaction rates are high. Clients are seeing significant performance improvement over our legacy platform. For example, video connection speeds on mobile devices are twice as fast on Converge. In another example, a Midwest hospital is using Converge for both ambulatory and inpatient care, and providers are giving high marks for the reliability and simplicity of the new platform. They highlight the intuitive user experience, pre-visit tech checks, and real-time troubleshooting for connectivity issues, all of which they say has enabled patients and providers to focus on care rather than technology. In the second quarter, we also expanded our work with our strategic partners. For example, our products are now sold in the Google Marketplace. Google and Amwell sales teams are co-selling in key accounts. And Google Cloud technologies are built into Converge and will bolster automation, user experience, analytics, and insight. We also accelerated our work with Cerner. a partnership that continues to gain momentum and has led to significant number of new clients choosing Amwell and two strategic Cerner client renewals. These clients span the spectrum from public health systems to academic medical centers to regional centers of excellence across the country. More strategically, we see telehealth transitioning from a digital alternative for an office visit into an independent arm of care delivery. The long-term impact of COVID on telehealth is driven not only by patient uptake, but more so by the volume of physicians who adopted it and will continue to use it. With digital care becoming mainstream, it is possible to expect a technology-assisted presence of healthcare around patients. Such constant presence And companionship cannot be achieved with only clinicians. It can only be achieved at scale using intelligent automation. For this companionship to be adopted as valuable, it must strengthen the cohesion between physical and virtual care, tying into real clinicians of various skill sets as the need arises. There was no such convergence in the market until today. No single integrated platform combining automated conversational companionship, virtual care, and physical care. This is changing with Amwell Converge platform and our recent acquisitions. We are assimilating the components needed for joining digital companionship, live telehealth, and AI know-how with Amwell vast ecosystem of payers and providers to offer an affordable longitudinal healthcare experience. Two weeks ago, we announced two strategic acquisitions. Our 320 million total investment was made via a combination of stock and cash. Both SilverCloud and Conversa feature incredible teams that share our values, culture, and mission. They are both outstanding, high-growth, high-margin technology companies. Both companies are loved by their clients with net retention of nearly 100% and with over 140% annual same-store revenues growth rate. Like us, their purpose is to further enable and not replace existing provider-patient relationships, And like us, they power healthcare's largest, most trusted players. It is easy to understand how Conversa and SilverCloud will directly improve and expand the value and differentiation of our most converged platform. As we already shared, we expect these assets to grow over 100% next year, adding approximately $30 million to our subscription technology business. Conversa brings capabilities to create, run, and manage automated longitudinal programs in Converge. The result is data-driven, highly efficient, always-on, fully integrated navigation and engagement experience. In addition to improving the patient experience and outcome, the Conversa technology can greatly enhance access and utilization of other Converge assets, including SilverCloud. Conversa is trusted by many leaders, including Northwell, UNC Health, and UCSF. We expect to fully embed Conversa in our platform by the end of this year. SilverCloud delivers a range of digital cognitive behavioral health programs that are evidence-based and clinically validated. These programs have shown results equivalent to face-to-face care for patients with diagnosable mental health conditions. Used globally by more than 300 organizations, including Kaiser Permanente, Optum, Providence Health, and over 80% of UK's National Health Service mental health services, Amur will leverage SilverCloud Health's award-winning platform and more than 17 years of clinical research to enrich our own behavioral health offering, as well as to develop new digital specialty care programs. SilverCloud also allows our clients and partners to enhance their own provider services, modules, and programs. Finally, it opens a new base for Armwell with trusted relationships in the UK and Ireland. Both companies enable significant care improvements through automation. Combined, we are now able to offer our clients and partners a single, unique platform that enables hybrid care covering physical, virtual, and automated services. Our open marketplace for apps and programs will allow health innovators to deploy deeply integrated health technology that could improve outcomes across the full continuum of care. We are well positioned to maximize the impact of providers by supporting them continuously before, during, and after the visits, expanding their reach and impact through technology. The result will probably be one of the most advanced and comprehensive digital care delivery enablement platforms to date. It will connect vast array of providers, payers, employers, and innovators as existing and new clients and partners growingly rely on it for powering bigger parts of their business. As we begin to think beyond 2021, we feel that we are better positioned to further improve margins and EBITDA. The growing demand for a high margin, scalable, and highly differentiated technology is fueling this change. With that, I would like to turn to Keith to give you more color on our financial performance.

Thanks, Ido, and thank you, everyone, for joining us on our second quarter call. Well, later in my prepared remarks, I'll unpack our performance this quarter. I want to first provide some insights into the two acquisitions we announced simultaneously two weeks ago. If you recall, we discussed on our first quarter earnings call that the theme of longitudinal care, while a core functional tenant of the Converge platform, is also driving our inorganic strategy in the areas of care coordination, interoperability, device agnostic patient monitoring, and the ability for Anwell to provide programs to manage chronic conditions if the health plan or health system customer does not have their own program. Acquiring these two companies simultaneously was intentional, as Conversa is focused on automation and care coordination, while SilverCloud then delivers lower acuity, CBT-based behavioral health tools to address the situations identified by Conversa. While both of these companies have been wildly successful in their own right, the combination of both of them at the same time on the Converge platform opens up many opportunities for Annwell to further deliver on our core mission, to provide the environment, the platform, and the tools for our customers' own providers to deliver care to their patients or members. While Conversa is mainly automation technology that will broaden Converge's functionality, SilverCloud is a behavioral health tool that, when appropriate, inserts the customer's own providers to treat their patients. Kaiser and their use of SilverCloud is a fantastic example of this dynamic. What is most important about SilverCloud and Conversa is that it highlights the differences of Amwell versus other virtual care companies as we are partnering with the provider and coordinators of care versus competing against them. This enablement theme and function is competitively differentiating and has been a key to our success in the selling season. In terms of financial impact, we acquired SilverCloud for $210 million and Conversa for $110 million, with both transactions paid for with a similar mix of approximately 50-50 cash and stock. Both transactions have additional earnouts based on operational and 2022 GAAP revenue milestones, that upon achievement will be paid for in AMWEL stock. In aggregate, and if operating on a standalone basis, the companies are expected to achieve $15 million in revenue in 2021 and over $30 million in 2022. On a GAAP basis and in terms of contribution to AMWEL, due to significant deferred revenue balances, we expect little to no contribution to our 2021 revenue, but approximately $30 million in 2022. While the deferred revenue write-down is a headwind to 2021 revenue, on a GAAP basis, we still recognize all of the expenses, which are significant, as both companies were building up the infrastructure to support their 100% growth rate. So on a GAAP basis for 2021, we'll absorb an additional $10 million in EBITDA loss related to these acquisitions. Both companies in aggregate are forecasted to achieve 70% gross margins in 2022. 75% of SilverCloud's revenue comes from the UK from notable customers such as the NHS. From a customer-based perspective, the majority of revenue from both companies comes from health systems, which was important to us and typically achieved over 140% net revenue retention. We closed Conversa yesterday and are expecting to close SilverCloud by the end of the month. Now, turning to our second quarter results, we reported total revenue of $60.2 million, an increase of 5% over last quarter, driven mainly by expansion of our technology subscription business. Total subscription revenue in the quarter was $26.8 million, a 9% increase over last quarter, and about a 15% increase compared to the second quarter of last year, if normalized for the two customers lost due to M&A that we previously discussed. The growth is a result of expanded health plan programs and health system modules. While we report average contract values on an annual basis, it's notable that average contract value is now around $700,000 for health plans versus $600,000 in 2020 due to the rapid expansion of programs being conducted through our platform. Total visits conducted this quarter on the annual platform was 1.3 million, and AMG performed 325,000 of these visits. Reiterating what Ido said, in spite of a Q2 and Q3 typical summer slowdown on urgent care visits, which was exacerbated by people experiencing a much-needed COVID passing euphoria, our clients continue to deliver significant care on the platform, and 75% of visits were delivered by our customers and providers. Total visit revenue is $27.5 million this quarter, which is the same level as Q1, despite the summer dynamic. Unpacking the mix, AMG volume continues to shift to higher acuity specialty visits, with the average price per visit rising now to $85 per visit range from the low $80 range in Q1 and $73 per visit on average in 2020. Similar to the first quarter, this increase was also driven by the increase in behavioral health visits, especially higher acuity psychiatry delivered virtually to patients mainly in the hospital. While the number of AMG visits decreased slightly, revenue remained flat as the mixed percentage continued to shift to higher revenue specialty visits versus simple urgent care. As we guided last quarter, services and care points revenue increased to $5.9 million from $5.2 million, and it's on plan as health systems begin to execute their capital plans in earnest in Q2. Gross margin increased over 600 basis points to 44% of revenue versus 38% last quarter. This was partially due to revenue mix shift more weighted to subscription revenue, but also efficiency measures implemented on the services side. Specifically, the efficiency aspects of our partnership with Google being realized, economies of scale and technology process improvements within our AMG business, and early aspects of margin expansion as we begin to migrate clients over onto Converge. Note that in Q3 and Q4, we expect margins to slightly dip versus this quarter as we begin to migrate some of our more complex customers onto Converge, and this will take additional resources to ensure the migration is seamless. But what we are seeing in the business and what we have done operationally and with technology confirms our ability to meet our IPO target margins in the mid-50% range. And with continued mix shift over time, eventually even higher margins, as our subscription business, our core business, is currently operating at above 60% gross margin. But again, that'll take time as AMG business currently represent half of our business. Moving to OpEx, we've also achieved similar efficiencies within company operations. R&D expense in the second quarter was $22.4 million, representing 37% of total revenue, which compared to 40% of revenue in the first quarter for a favorable $600,000. We achieved these efficiencies through better leveraging our strategic partners in the development of Converge and also offshoring some aspects of engineering that we originally thought we'd keep in-house. These changes have been reflected in our favorable adjustments where we revised and narrowed EBITDA guidance that we will discuss later in the call. Sales and marketing spend of $14.8 million is an increase of $1.1 million sequentially versus Q1, but was mainly due to our client forum. Q&A expense in the quarter increased $2.8 million, mainly due to one-time legal and M&A expenses that have been excluded from our adjusted EBITDA calculations. We are reporting an adjusted EBITDA loss of $23.7 million compared to a loss of $26.4 million last quarter. The majority of sequential favorable increase was due to our gross margin expansion, but also successful operational and technology efficiency measures in our operations. We expect R&D and sales and marketing spending to increase over the remainder of the year as converged spending increases and marketing events take place, but at a lower cost versus our original guidance, and thus the favorable revision to adjusted EBITDA. We ended the quarter with $975 million in cash. In terms of active providers, we closed Q2 with 71,000 active providers delivering care on the platform, of which 4,000 were AMG providers. as we touched on in q1 the number of active providers in q2 and the next quarter will decline as those doctors which we added solely to handle the covid spike during the peak of last year will roll off in q2 and q3 and we'll also added a number of providers to the platform when we were doing 40 000 visits in a single day but good for everyone this is now passed and we do not need this level of amg doctors on the platform Since then, we have added more specialists as our visit mix is migrating to that of higher revenue part of our business, and our customers' doctors are delivering more care through their own providers. Regarding our annual guidance, as either discussed, we are now reflecting the impact of how we believe the new Delta COVID variant will affect the flu season. While no one has a crystal ball with COVID and now especially with the Delta variant, our revised guidance range reflects a moderated flu season on the high end and a low flu season on the low end of guidance versus a normal flu season, which we originally assumed when we provided guidance in March. We are confirming original guidance for our technology subscription business as it is operating at or above plan and are also confirming our original guidance for our services and care points business. There is potential for upside in the care points business given the recent CMS announcements regarding grants for health systems. We will update you more on this dynamic on our Q3 call. For visits, we are narrowing and lowering our visit forecast to a range of 1.4 to 1.5 million visits from our original range of 1.5 to 1.7 million visits. This translates to a revised total overall revenue guidance of 252 to 262 million. I want to give you the math for your model so that you can isolate the adjustments solely within your visits line. The top end of our original guidance range was 270 million, and this represented approximately 1.6 million visits. The difference between the top end of the visit ranges, 1.6 declining to 1.5 million visits, is 100,000 visits. And at $80 average revenue per visit equates to a change in about $8 million of total revenue. Thus, we're lowering the top end of our range $8 million, from $270 million to $262 million. A low flu season in our forecast model equates to approximately 1.4 million visits, a further 100,000-visit decrease. So again, using the same math, we are setting the lower end of our revised range at $252 million. In terms of the two M&A transactions contribution to our 2021 results, on a GAAP basis, they're adding little to nothing to our revenue due to the significant deferred revenue write-offs, but will burden EBITDA by $10 million, mainly due to the significant ramp-up of operational expenses in anticipation of supporting their 100% growth in 2022. So in terms of EBITDA, we are favorably increasing and narrowing our organic EBITDA range by 12 million and netted together against the 10 million of EBITDA burden caused by the two M&A deals equals a range of 154 million to 146 million EBITDA loss on a GAAP basis. Said differently, on an organic basis, our revised EBITDA range would be 144 to 136 million EBITDA loss, but on a GAAP basis, combined with the two M&A deals, is 154 to 146 million dollar loss. Next quarter's subscription revenue will be flat to slightly up as specific new logo implementations will hit starting in Q4. Services and care points will sequentially increase double digits each quarter as hospitals continue to execute on their capital spend, and we execute marketing campaigns for those systems and plans. With visits, since we're halfway through the third quarter, we can say that we are seeing specialty visits continue to grow, less so with urgent care visits. In terms of distribution of visit revenue, assume high single digits over Q2 with a balanced majority of growth coming in Q4. As Ido discussed, gross margins are expected to temporarily decline next quarter and in Q4, as we have begun to migrate some more complex clients onto the Converge platform, which will temporarily burden gross margins. In conclusion, we are pleased with another good quarter, especially noting the positive results we are seeing in our gross margins and operational spend. We're pleased to announce our two acquisitions two weeks ago and yesterday closing the Converge acquisitions. We continue to evaluate opportunities to enhance the overall functionality of Converge to deliver full longitudinal and coordinated care and have ample funds to execute on our inorganic strategy. We are happy with the progress of our Converge development and rollout and especially the competitive and operational advantages we are seeing steepen the slope of our growth opportunities and expanding our efficiencies. I'll now turn the call back over to Ida for his closing remarks.

Ida? Thank you, Keith. I hope today's report further clarified our unique strategy and the growing evidence for its impact on our current and future growth trajectory and overall performance. And with that, I would like to open the call for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 on your telephone. However, if your question has been answered and you wish to remove yourself from the queue, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from Ricky Goldwasser with Morgan Stanley.

Yeah, hi, good evening, and thank you for all the details. My questions are going to focus on one, on guidance, and second, on the margin. So just to understand the second half guidance, I mean, Keith, it sounds like the difference here is around your assumption over the flu. So just kind of like want to compare, to think through, just better understand your assumptions around sort of the Delta variant, What do you think that does to visits, the flu and the visit mix? And also there, I mean, you're talking about scaling back on number of physicians because we're seeing less COVID-related visits. Do you see any scenario where, because we're now seeing an uptick in COVID, that you'll have to rehire?

Hi, Ricky. This is Ido. Good evening. I'll try to answer and maybe Keith will complement my answer. Our change in guidance is exclusively related to visits and very specifically related to cold and flu. The performance of visits from the beginning of the year was exactly according to our models. As I mentioned, on July 18th, the American Pediatric Association reversed their guidance and now mandates K-12 masks and social distancing for children. A few days later, on July 27th, the CDC reversed their own guidelines, and now masks are mandatory in all effective areas, which is about two-thirds of the United States. As you remember, flu and cold are a significant part of our visit demand in the second half of the year, which is a big part of our overall visit traffic. With those changes, we have to take into account a scenario where flu and cold are much lower than a normal flu season that we assumed earlier in the year. At the same time, we cannot automatically assume COVID-related increase in visits, and that's what's driving our guidance. Obviously, if, and God forbid, if we see a serious illness coming back, those dynamics will change and will mandate the changes also in our own performance, but more importantly, in our preparedness. Should we need to increase the availability of more providers in AMG? We are much better prepared to do it than we were last year, both in the way of operationally and technologically. In addition to that, many of our clients are much more integrated and ready to chip in if that emergency should reoccur.

So if we see, if this very recent resurgence continues, should we assume that that would provide upside to the revised guidance that you provided today?

That's definitely a possibility. Look, I can tell you, for example, that even from July to August, we've seen an average growth in urgent care AMG visits of 17%. However, we noticed a growth of 40% in the southern hard-hit states. So obviously that's an unfortunate situation. If that could continue nationally for the end of the year, that would definitely have a significant effect on demand. It's also possible that the reverse will happen, which is what we see in England. We will see a decrease of the Delta variant and coupled with a removal of masks and social distancing, which is likely going to create a flu season that is much more prominent. However, we really can't assume that based on what we see right now. And therefore, we had to adjust our guidance to the scenario that I just articulated, realizing that there are other possibilities that are driven by factors that we don't control.

Okay. And then on the margin, it sounds like you're starting to see at least this quarter the benefit from Converge. I understand that, Alex, in the second half of the year. But I think one thing that we're kind of like all waiting to better understand, and we're getting a lot of questions from investors, is around the potential benefit from converge to margins on a steady state basis. So now that you're seeing the benefit in the quarter, could you maybe provide us at least some sort of, you know, maybe kind of quantify what that steady state potential incremental benefit from converge could be to margins?

Sure. So here is what we know. We converted, we upgraded 38 Amwell Now clients, which as you may remember, is the simplest part of our client base in way of use case. And we have about 1,300 providers on the platform. What we've learned is that, A, clients love it, as I mentioned earlier. We have reasons to believe that, at least as far as Amol now is concerned, the deployment time is faster, the hosting is super efficient, the support is much better in way of efficiency. And that leads us to believe that as we deploy the rest of the 85% customers, which translate to much larger proportion of revenue, AMO now is a much smaller proportion, footprint of revenue, because it's a simpler product, we're going to bleed those efficiencies into the rest. More importantly, the impact of Converge is not only related to the fact that it's super efficient and modern platform. It's mainly related to the fact that the mix between service revenues and technology revenues is likely to change if clients that appreciate the value of Converge are likely to use it more frequently, increase the scope of use, use it for more things, and increase the reach. We also build Converge in a way where it's more likely for people to upsell or to buy up functions and capabilities with apps, modules, and programs that are much better integrated into Converge. We are going to report As we deploy, we plan to upgrade a sizable amount of additional clients already this year and complete the lion's share of our clients by the end of next year. However, it is a little bit too early to extrapolate from the AMO now install base into the full install base. The news will be positive and meaningful, but we'd like to take a few more quarters in order to quantify it for our partners.

Okay. So just lastly, before I go back to the Q3, if we think about the 600 basis points in gross margin expansion, you know, what percent of it was the Google relationship versus Converge?

Well, if you were to... Go ahead, Peter. I mean, we're not... It was... material. You know, I mean, you had Google, you had, you know, operational economies and scale efficiencies on the AMG providers. You know, we've been talking about those operational economies and scale for a while, and those are starting to come to fruition or are coming to fruition. There's technology enhancements within the AMG side that we're better utilizing. You know, there's higher specialty doctors that, you know, cost a lot more. And then there's the migration over to the Google Cloud and some other leveraging of strategic partners. So, There's all of those, and then we're starting to see early days of the efficiencies coming from the Converge platform. It's really all of those.

Okay, thank you.

Your next question is from Charles 3 with Cowan. Your line is open.

Yeah, thanks guys for taking the questions. You know, maybe first just to just follow up with Ricky on the margins. When we think about the cost related to scaling up with Conversa and ServerCloud in the back half of the year, you know, recognizing that we're not getting on the revenue side, can you give us sort of a breakdown between OPEX and cost of goods? Is it mostly in operating OPEX, or how should we kind of split that burden out?

In terms of the converged rollout, it's going to hit both above the line in COGS as well as in OPEX. So we talked about the expansion of R&D. When you go through the numbers, you'll actually see that we unlocked a fair amount of efficiencies in the R&D line. There were certain projects that we've offshored. We thought we were going to keep those in-house. We've been able to leverage some of our strategic partners for other aspects of Converge. So we actually decreased on our R&D spend quarter over quarter. As we migrate the more complex customers onto the Converge platform, there is going to be a higher level of customer support. I mean, it has to be seamless. and the functionality that they're going to be able to, you know, utilize on the converged platform is much more than the current platform. So the level of customer support is going to be higher. So you're going to see it, you know, to answer your question on both sides, one, in the gross margins, and two, in the OPEX. Although I will say, you know, the company has been very focused on this, and you are going to see when you go line by line through the OPEX, You know, we have been able to unlock and we're proud of the efficiencies, you know, that we think are going to continue, you know, below the line.

Thanks. Thanks. And actually, I might have misspoke, but what I was asking was with Conversa and ServerCloud, you talked about the $10 million EBITDA burden in the back half of the year. Is that also going to be kind of split between the two, COGS and OPEX?

No, it is actually because of this thing called deferred revenue write-down or haircut. It's a nasty thing with acquiring tech companies. You know, the gross margins actually could be negative for the business because we get to recognize little to nothing in terms of revenue. They have a significant deferred revenue balance that you're going to see when you look at, you know, the Q3 balance sheet. But all the OPEX is there. So the majority of it, far majority, almost all of it is OPEX. Both companies are growing over 100% year over year. So they were building up all aspects of their business to support that massive growth. You know, we have to absorb that for the remainder of the year. Going into next year, obviously, being on the platform, they're going to realize, or we're all going to realize, they're part of the family, you know, efficiencies by combining the businesses. But that $10 million burden is coming from, you know, both those businesses for the remainder of the year when we bring them on the platform.

Okay, thank you. And then just sticking with Converse and SilverCloud, can you talk a little bit more about, you know, obviously, you know, you've worked with these companies prior to acquiring them. Can you talk about sort of the customer overlap between the two, between them and yourself at Amwell? And, you know, how are you thinking about cross-selling opportunities, particularly, you know, into either clients of Converse and SilverCloud that might not be Amwell clients? And

and in that case you know what are those clients currently using as a virtual care platform thanks i mean charles it's a great question the venn diagrams get us very very excited i mean when you look at silver cloud silver cloud we're going to treat like a program and you know 75 of the revenue is currently coming from the uk you know they have the nhs contract which was one of the larger behavioral contracts you know in that part of the world so You know, we don't have business in that part of Europe. You know, we do have a significant presence in Israel. But, you know, we clearly have been talking to customers over there. And buying SilverCloud really is going to open a number of doors, you know, organically and inorganically. You know, we are very focused on expanding the footprint into Europe. as well you know when you look at conversa conversa has a fantastic customer list in the u.s many of those customers are already our customers i mean that's how we really were able to i mean we did both of these deals simultaneously fully diligence you know conversa quickly alongside of uh silver cloud but the neat thing about converses it really automates the delivery of all of our products, our virtual care. And when you talk to the customers that they do have that overlap with us, it really becomes a companion with the patient as they're on their healthcare journey. So buying both deals simultaneously was intentional because Conversa identifies a number of situations where the patient or member requires behavioral intervention. And so When we look at the Venn diagrams, you know, we do see it opening a lot of doors, both domestically and internationally. But, you know, Silver Cloud internationally gets us really excited.

Great. And one clarification, the $30 million contribution next year, that does not assume any cross-selling?

No, it does not. You know, that is a GAAP number, so there is deferred revenue going into next year. So, you know, assume the full $30 million, you know, in your model. They're actually going to do somewhat better.

Great. Thanks, guys.

Thanks, Charles.

Your next question is from Eric Perker with Nefron Research. Your line is open. Thank you.

I'd like to double-click on R&D expense.

I know as we came into the year, you spoke about increased support for Converge, and I recall roughly $36 million. It would be helpful to understand some of the components back in that expectation and where you were able to outperform or expect to outperform.

Sure. So, like many companies, we basically decentralized our development and our service-oriented architecture allowed us to do that. We have teams today working really around the globe, from Israel to Mexico to India to Eastern Europe and all over the United States. That type of development, which was new to Amrel, is now really a mainstream way to operate, and it does drive enormous efficiency. We're able to recruit anywhere. We're able to get great quality at a much more decent pricing. You may see some of it in the R&D expense earlier this year. I'd like to at the same time point out that we still have very aggressive plans between now and the end of the year that should basically account for our spending plan. There is a possibility that it will end up being a little lighter than our original plan because of the efficiencies that I just mentioned, but we're not prepared to make any significant change right now.

Eric, the efficiencies that we've identified and that we believe are going to continue are incorporated the $12 million benefit into our adjusted, you know, increased EBITDA guidance.

Right. So they're part of that as well as the upside from the first half of the year? Correct.

Okay. And then, you know, along the similar front, when we think about some of the benefits of partnership, you called out Google sales teams, and it's kind of like, you know, sales effort on both sides.

Can you give us a little more insight on what it is that the Google teams are able to do today?

sure i mean i we have three levels of a relationship with google one relates to the migration to google cloud that i've discussed already the other one relates to technology collaboration again different apps and and technologies and the third one is the sales collaboration google as you know powers and have vast relationships across the equal the healthcare ecosystem in the United States and globally, but currently we focus on the United States. They are fairly effective in increasing our channel, our pipeline, in the sense of helping us get access to other qualified opportunities. And some of their products complement our products for certain clients. The marketplace that I've mentioned allows people to go online and basically reach AMOL products through the marketing machine of Google. So it's both a technological effort and a personal effort through the sales executive of Google really around the United States and hopefully in the future beyond the United States. So they basically sell our technology, our services, and as we create more solutions together, we are really cross-selling each other's solutions in the marketplace.

Does it feel like you're still early, or was your comment this period to suggest that there's some increasing momentum there?

We are pleased with the momentum of the Google relationship. It's a great partnership, and the momentum is growing. It's nowhere near its full potential. We believe there is a lot of room to grow in what we can and will do together.

Thank you, Beth.

Your next question is from Jaylindra Singh with Credit Suisse.

Your line is open. Thank you, and hello everyone. I joined the call a little late, so apologies if this has been addressed. But following up on Charles' question earlier on Silver Cloud and Conversa, from the customer's point of view, will there be any heavy lifting for integrating these new solutions, or will all of that come through a single integrated product with Converge? Maybe any color would be helpful.

So, hi, Janendra. Good to hear your voice. As we discussed, We have, as you can imagine, we made a significant plan for integration for both companies. The integration is a little different. Conversa will become part of the core of Amwell by the end of this year. This plan was thoroughly reviewed before the transaction, obviously, and is very much on the way. So it's not something that we are concerned about or have any ambiguity about, and it's not a heavy lifting. It's an effort, but it's not something that we can do or expect any difficulties doing. The Silver Cloud is a wonderful module, as Keith mentioned, that will be added to the Converge engine that is built to get modern data added into it. So then again, It's not a very large heavy lifting to expect since the technology is designed to accept these type of add-ons.

Fair point. Just a quick follow up. I was wondering if you could spend a little time on how you're thinking of opportunities or capabilities from chronic care, RPM point of view in the health system space. One of your competitors has highlighted multiple chronic care agreements with health systems. Just wondering if you are having any discussions in this area with any of your clients?

Oh, absolutely. It's a very, very important area right now that also connects to home care and other similar adjacent territories. The whole effort that we are making is really designed to bring together a singular platform that includes, does not ignore physical care. Virtual primary care referrals is a good example of that, but rather integrates into physical care, which really allows for the full spectrum of chronic care from primary care, acute care, all the way to different types of specialties. Virtual care, the ability to meet those different providers online and not only in person. And very importantly, also, ultimate longitudinal care. So the ability to collect data from sources like remote patient monitoring that you mentioned, labs, many other data sources, analyze it, and then create the right intervention that could be a physical visit with a clinician an online visit with a clinician, but very importantly and growingly, also a set of automated, highly efficient interactions that really complement into an omnipresent healthcare experience. We believe that the benefactors of this platform are first and foremost those chronically ill patients that require care that spans over continuously over many years.

Bill Ender, if you were late to the call, then, I mean, in my prepared remarks, I talked about that the majority of revenue from these companies comes from the health systems, and that was very important to us. So by being integrated on our platform and the fact that both of these companies highlight and insert the health system's own providers when appropriate and when there's an opportunity, you know, we see a massive opportunity there. So when we're looking at the landscape, you know, and knew that the areas that we wanted to, you know, enhance inorganically, you know, both of these really differentiated themselves by, you know, creating a product that, you know, worked really well in the health system space. So, you know, both of these assets were intentional for that aspect.

Great. Thanks, guys.

Your next question is from Sean Wieland with Piper Sandler. Your line is open.

Thank you. Keith, what's the ramp on that $30 million in 2022?

When do you think you're going to begin actually recognizing GAAP revenue?

In Q1. You know, I mean, it's probably halfway through Q1. You know, on a standalone basis, they would have done 15 this year. You know, you take four 12s, you can know what they were going to do roughly, you know, given the ramp. That's going to continue throughout the entire year on a, you know, I would say somewhat exponential basis. Okay, so how much of the deferred revenue write-off extends into 2022?

I'm just trying to get a sense of what that ramp should be.

Well, I gave you the gap number. So the gap is $30 million. So I did the math for you. So that assumed gap, $30 million contribution to AML next year. So it just backs out. It alleviates the need to figure out the deferred revenue.

Okay. Okay. Awesome. Can you comment on how many installs you've done so far on Converge and how many people are live?

Sure. So we've done... Hi, Sean. Hi, Diego. I'm well... 38 AMO now clients, 1,300 providers. I don't have the exact number of patients that are associated with that, but it's not a huge amount yet. It translates into about 15% of our install base, but a much smaller number as it relates to our revenues because AMO now is a much less expensive product with much simpler use case.

All right.

And then last one, I'm paying attention to the non-AMG visits, 975,000 if my math is right.

How much of that decline is a tough comp and how much of this is a read-through into utilization of the software?

I would say it was neither. I mean, Q2 is always one of the lower months, you know, and it's all really an urgent care. So, you know, if you look at the revenue per visit, I mean, we were $73 on average last year. In Q1, it shot up to $83. We got it to $80 across the board for the entire 2021. We're already at $85. So the decline is solely in urgent care visits. The specialty, especially behavioral, but other specialty areas, you know, continues to increase. So, you know, on the unpaid visits, the customer visits being conducted on the platform, you know, those were mainly urgent care. So it's just typical summer months. And then we did see, and at one of the conferences we mentioned it, there was this, and thank goodness, this COVID passing euphoria where people, the weather was good, people were putting off receiving healthcare, just celebrating what we thought was the passing. So you know it's typical q2 declines it was isolated in the urgent care area specialty continues to increase thus the 85 dollars now revenue per per visit okay thanks for that thanks sean your next question is from ryan mcdonald's with needham your line is open Thanks for taking my question. Ido, first one for you. Last quarter you talked about with Converge that as you continue to get the installations going and building the ecosystem, that a key aspect of the monetization strategy was the app marketplace and getting developers to continue to build apps there. Just curious how that's trending in terms of starting to get interested developers to start building some of those apps and sell out that marketplace.

Hi, Ryan. So there is a healthy appetite and interest in those apps and now also with writing the programs with our new capabilities. As I mentioned earlier, we don't expect to open the app store before the end of the year. We may introduce other apps through the years, not through the app stores. However, we believe that the cohort of innovators will become a very important part of the value proposition of Amaral, whether it's external third parties or even our clients and partners in 2022 and beyond.

Excellent. And then for Keith, as we think about the acquisitions and the impact that they have on 2022, I'm just curious what you think, your thoughts on sort of the margin impact and the particular adjusted EBITDA margin.

Not, I guess, asking for guidance today, but would you generally expect them to be neutral or slightly dilutive to adjusted EBITDA next year? It'll be neutral, but the margins are 70 percent, you know, and that's on a gap basis. So includes all the deferred revenue and includes, you know, well, the deferred revenue. So on a gross margin basis, you know, it'll be it'll be accretive, you know, 30 million and 70 percent. you know, on an adjusted EBITDA basis, you know, we need to continue to make them more efficient, you know, and capitalize on using our platform. So it'll be neutral next year to adjusted EBITDA. Understood. Very helpful. Thanks for taking my questions. Thanks, Ryan.

Your next question is from Ravi Misra with Berenberg Capital. Your line is open.

Hi, thanks for taking the question. So I guess, Ido and Roy, I want to kind of touch on converge and the penetration and how do we think about that with the kind of ACV expansion that it seems like you're seeing right now. So maybe we can start on that latter point first. You know, I think you said ACV around 700,000 now in your kind of health plan segment. How much of that is being kind of powered by, you know, this move to converge in the near term, or is it really a an issue where your clients are adding more modules? And kind of how should we think about that as the base running forward? Is this kind of a one-time thing or the kind of new normal that should be fueling our expectations going forward?

So, Ravi, I'm not sure that we are prepared to talk about next year's guidance yet, but I can definitely talk about trends. The increase that you see relates to many things, but the kicking of Converge yet, you see a lot of existing modules, things like virtual primary care, and also specialty care and other services and technologies that we provide. Converge has carried a very large promise for upsell in multiple ways that are not yet quantified. So the efficiencies and the progress that you've seen actually relates mostly to other efforts that we've done throughout the companies. And we're still waiting to begin to see a converge upsell impact. Although when we talk to our clients and partners, we are very encouraged by their reaction. People are beginning to plan quite strategically. An interesting tidbit is that we found out that the larger, more complex the clients are, the greater the value of convergence. So we expect to see deals that are probably going to be bigger in size because of the many capabilities of convergence. The value of one-stop shop, a single integrated modular scalable platform for a large organization is very apparent.

Greg, maybe just pushing on that one a little bit more, you know, because you're going to have about $800 million or so cash on the balance sheet, roughly speaking, after the deals close.

And, you know, you're talking that this is going to give you kind of firepower to go after more complex accounts with Converge. So how do you guys think about maybe kind of the allocation of capital when it comes to going after that opportunity out there versus kind of acquisition?

Like, why wouldn't you, given how exciting this seems to be and kind of our check suggests the demand for something like this, Why wouldn't you kind of invest much more upfront to kind of drive this growth? Thanks.

Well, we are investing quite significantly already. I'm not sure if it's little or less. In our opinion, it's quite significant this year. Time to market is very important and completing everything we need to build is very important. We are trying to create the best combination between organic investments and inorganic investments. For example, we were really thrilled to find the ingenuity of Converge and the quality of the technology that fits so well in the core of Amwell. We also realized that behavioral health is incredibly important, not only for behavioral health patients, but really as part of any program that anyone would want to create. And that's why SilverCloud fit so well. We're going to continue in the same fashion to look for ways to further improve the value for our clients, whether it's organically, but also inorganically by finding things, technologies mostly, that make Converge better, that makes our platform better for our clients. It's not that complicated to imagine what I'm talking about. We focused on one very powerful program now, a program engine, if you will, that really amplifies the value of each therapy. with a silver cloud the other therapeutic areas where such examples could be very very helpful and we want to give our clients and partners the full flexibility to use our if you will native apps native programs that are available as part of converge built in and ready to go or for others that have other assets to incorporate their own assets should that be a palatable for them When you go down market to smaller organizations, it's more likely that they would want the complete offering provided by us. When you go up market to organizations that already made significant investment in different assets, the flexibility of Converge to take into account what is already there and embed it seamlessly in one cohesive offering is very helpful to them.

From a cash perspective, you're right. We have slightly north of $800 million. We're going to be able to execute on both strategies, work as fast as we can to migrate all of our customers over on the Converge while equally continuing to execute our inorganic strategy. The environment has changed. People are no longer delusional. Both of these assets we acquired are perfect and really highlight the advantages of operating in the Converge environment. you know stay tuned for more we are we are very focused you know both on converge and on our inorganic strategy operator can we go to the next question if there are any definitely sir our next question is from donald hooker with key bank your line is open

Great. Good evening.

So I think you guys in the past have talked about .

I'm going to put my block here and see if you're going to kind of share any changes to this.

Can you talk about sort of the cadence from your venture 2021 to that point? It sounds like there's a lot of moving points. The moving parts with some of these acquisitions and GAAP accounting and the deployment also converge. As we exit 2021, should we assume kind of a linear progression, and you could not break even as you grow over the next I mean, you broke up a bit there, so I didn't get the whole question. You wanted to break apart the EBITDA enhancements or the increase to our guidance for EBITDA. On an organic basis, we bettered the guidance by $12 million. And when you net the $10 million burden from the M&A transactions, it arrives at the range of 154 to 146 instead of, or I'm sorry, 157 to 147 instead of 154 to 146. So, you know, It's going to be better than linear because these efficiencies that we are unlocking for all the different examples, the strategic partnerships with one of them being Google, the economies of scale and the technology enhancements within AMG, once the R&D spend for Converge subsides. you know, we are still, we have a path to what our IPO target margins were. You add all those together, you know, we continue to march toward, you know, the path to profitability. And I'll just ask one follow-up real quick.

So it sounds like their material costs deploying converge across the client base. I mean, does that sort of equally extend into 2022? I'm just sort of wondering if we're going to have a snapback in gross margins.

I mean, you're telling us that gross margins will be weak in Q3 and Q4. Does that kind of bounce back to maybe 2019 levels and 2022? We do have a path to hit the mid-50s with the companies that we are acquiring and what we're seeing margins could be on the Converge platform. We see paths to even bettering that. But we do have a path and are confident in getting back to what we told investors at the IPO. That won't happen, you know, definitely out of the gate next year. You know, in terms of timeline, we do have to migrate our customers over onto the converged platform. You know, the next two quarters you are going to see a dip for the reasons that we talked about earlier on the call, you know, the increased customer support. That will continue in the next year, you know, as we continue to migrate the customers over.

Okay, thank you.

Your next question is for you.

No, please go ahead.

Thank you, sir. Your next question is from David Larson with BTIT. Your line is open.

Hi. Can you talk a little bit about the platform subscription revenue growth?

I mean, up 9% in the year. I think you said it would have been up 20% except for those two clients that were acquired.

Can you give any more color around that acquisition process? Were those hospital customers or were they health plan customers? And any sense for what telehealth platform they switched to?

Just any more detail around that line item and expected growth in that would be helpful. Thank you. yep the one company was md live that was acquired so it was you know uh their acquirer was a customer um so they are on the md live platform although we still do business with them uh to a small degree um because we do things differently we offer different functionality than md live The other one was a large hospital system that was acquired that has not chosen their telehealth platform yet. So, you know, they are using a hodgepodge of different platforms. There were two very large health systems that were brought together that we, you know, talked about during the IPO. Those are the two. Subscription growth was 15% on a normalized basis if you remove those two, 9% sequentially. And the reason is just the additional programs and modules being sold on the platform. So when on the health plan side, You know, there's been an increase in the number of programs that, you know, have been subscribed for their members. And then on the health system side, equally, you know, there's a lot of modules that we're seeing nice increases. You know, the different EHR integrations, telepsychiatry, behavioral health, AmWellNow, you know, and then all the carts that are sold require modules as well. So all of that goes into subscription, you know, other than obviously the capital spend for the carts, and those are the reasons for the increase. Okay, great. Thanks very much, Keith.

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

Thanks for taking the questions. Keith, you mentioned Conversa and SilverCloud are going to grow about 100% next year. Can you talk about the line of sight into that revenue growth and, you know, what percent of that is already contracted today? Thanks.

The neat thing about both these companies, which gets us really excited to put them on the platform, is their net revenue retention is 140%. So they sign a contract, and then it grows, you know, another 40%, you know, over the following year. The contracts are anywhere from a year to 18 months. So there's a significant line of sight, you know, for the $30 million that we guided to. You know, on our platform, we're pretty excited. Talking earlier, you know, about the Venn diagrams, you know, there's a lot of customer opportunities, especially in the U.K., But, you know, to answer your question, given the 140% net revenue retention, you know, there's a significant line of sight.

Got it. Thank you. Thanks, Alan.

And your last question is from David Grossman with CFO. Your line is open.

Thank you. So in your prepared advice, you spoke of good momentum with Cerner. And I'm just curious, now that there's more stability in the health system, kind of end markets, if you will, any updated thoughts on how the relationship with Cerner and the other major EMR vendors with large health systems evolves over time?

Hi, David. Good to hear your voice. Cerner has been a terrific partner for Amwell, and you're right to assume that as both companies matured in their thinking around digital care delivery, the partnership became better and better. Our relationship with Cerner is different than our ability to integrate with the likes of Epic and Adams. We do integrate with a long list of EMRs, But the difference is that with Cerner, we do that very proactively in order to create a much seamless experience for the Cerner clients. We also have much bigger investment in the Salesforce training and go-to-market efforts between our team and the Cerner team. So Cerner went through quite a bit of change recently, as I'm sure you know, but it's being stabilizing again. Because we knew them for so many years and we worked together for so long, that change does not have any impact on our relationship. It's as strong as it was. And as I mentioned, we begin to see really good momentum. Converge on the Cerner platform works really, really well. And it's well received by the clients and prospects of Cerner.

Are you seeing anything in terms of the others, like in Epic, where clients are contemplating whether to upgrade to that platform, and if they're running on Epic, and the cost and complexity of doing that? Does that enter into the equation at all?

Well, Epic, as you know, has an ability to do video conferencing today inside the EMR. When someone buys Armwell, they basically buy it for a long list of other reasons, and there are many Epic clients. Epic on Converge is a big upgrade. to the previous Epic integration. We have native FHIR extensions. We have lots of technical details that will probably bore most of the people on the call that make it work faster and better and in the most seamless way than before. Therefore, it's a very valid option. We plan to grow in both Epic and Cerner accounts. probably a little faster with Cerner because of what I mentioned earlier.

Great. Thanks for that and good luck in the back half of the year.

Thank you, David. Really appreciate it.

And that concludes the question and answer session for this conference call. I will now turn the call back to the Chairman and CEO, Ido Schoenberg.

Thank you, Paul, and thank you, everyone, for joining our call today. We look forward to continuing reports on our progress on our next call and in the former calls that follow. Have a nice evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. Give me now a disconnect. Stay safe and well.

Have a great night.