American Well Corporation Class A

Welcome to Amwell's conference call to discuss our fourth fiscal quarter and year-end of 2023. This is Sue Dooley of Amwell Investor Relations, and joining me today are Amwell's Chairman and CEO, Dr. Ido Schoenberg, and Bob Shepardson, our CFO. Earlier today, we distributed a press release detailing our announcement. Our earnings release is posted on our website at investors.amwell.com and is also available through normal news sources. This conference call is being webcast live on the IR page of our website where our 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'll make forward-looking statements regarding projected operating results and anticipated market opportunities. This forward-looking information is subject to the risks and uncertainties described in our filings with the SEC, and actual results or events may differ materially. 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'd like to turn the call over to Ido.

Thank you, Sue, and hello, everyone. Pew4 marked the close of the strategic year for Unwell. We advanced the breadth and maturity of our offering and migrated a big part of our install base to our new platform, Converge. We have had an excellent reception to our solution, sizable market wins, powerful client validation, and we documented compelling proof points. Also, we improved focus and efficiency in our company and are committed to continue optimizing our organization to streamline and propel growth. Based on these 2023 achievements, we begin 2024 with high conviction regarding our path to profitability. So tonight, in our guidance, we will provide new transparency into how we are completing this replatforming period, returning to growth, and how our path to profitability will play out. To begin, here are a few highlights of Q4. The standout event of Q4 was the previously announced win with the Leidos Partnership for Defense Health. Together, as described in the $180 million task order, we will modernize and provide digital care enablement for the Defense Health Agency, benefiting that organization's 9.6 million beneficiaries. We are progressing well with deploying our solution for the U.S. military, enabling the DHA's Digital First initiative. I'm pleased to report that we have achieved the first milestone as planned and on schedule and launched our digital behavioral health program for the initial five sites. In Q4, we also prepared for large payer migrations that have already taken place in Q1. The percentage of Q4 visits on Converge were relatively similar to Q3 when we met our goal for the year a quarter early. In the first days of Q1 24, we successfully migrated our strategic clients, Elevance and Highmark. As a result, visits from Converge today approach nearly 70% of total. Our platform is scaling and performing well. I would also like to mention a sizable Q4 win with Ampler, part of Medibank, one of Australia's largest private health insurance companies, serving more than 3 million customers. Their initial rollout is planned to include automated programs in digital behavioral health and lifestyle management. I'm proud to say that in Q4, provider and patient satisfaction measured by our thumbs-up rating metric reached all-time highs. Also, indicative of high client satisfaction, we had an active quota for renewals and expansions, including the following. The HSC in Ireland is expanding use of our digital behavioral health solution thanks to healthy adoption. Integris Health was a large win for us in Q2 of 2023 and is already a Q4 expansion win. Integris will extend its use of our ED discharge program outside the ED. With our automated chats, Integris behavioral health specialists can stay closer to patients between visits while prioritizing high-acuity patients. In addition, our virtual nursing solution continues to resonate in the market. Related to this, we had a healthy expansion with San Bernard Healthcare. Our Q4 performance demonstrates how our existing client base is fertile ground for future growth. Continuing on the topic of growth, we are putting the final pieces in place to transform our commercial organization and re-accelerate Booking's momentum this year. Specifically, here are a few highlights. We completed a sales model transformation, moving from distinct account management and sales to a combined hunter-farmer model. This will allow us to streamline client interactions, engage in more strategic selling discussions, and sell a broader basket of services. We completed tenant review and upskilling initiatives, including adding important leadership in sales operations. New talent is coming from ROI-oriented, hunter-farmer-based enterprise selling environments with optimal experience and skill set to sell our new hybrid care delivery platform. We launched a new sales and compensation model at our commercial kickoff held last week. The bulk of this work is behind us, with fine-tuning going on in the first half of this year. With a growing list of expansions, the new client wins under our belt, and we are confident our selling motion resonates across the healthcare landscape. It's an approach squarely aligned with operational and financial pain points that direct our clients' spending priorities. We have achieved a lot in the past year. I believe we are better positioned than ever to deliver the profitable growth promised by our large market opportunity and highly differentiated SaaS-based software infrastructure platforms. As we turn the page to 2024, I believe it is crucial to understand the transformation we have successfully achieved. It's a transformation from a telehealth vendor to a hybrid care enablement partner that healthcare organizations are turning to as they seek to modernize and achieve operational goals. It's also a transformation from selling video visits to connecting and mobilizing digital assets and provider networks within and between client organizations. I want to share a couple of key points about this. Our infrastructure platform acts as a distribution system that digitally empowers our clients to address the challenges they face and generate better financial and health outcomes. Our clients are looking for one infrastructure consolidating their digital initiatives. The path forward connecting disparate healthcare facilities, teams, patients, and digital assets is far from obvious. Time and again, we hear they have tried to build this layer themselves, and they are coming to us recognizing our expertise. In addition to our technology platform, our professional services teams are proving to be a powerful differentiating element for us. We are particularly good at the challenging and complex work of integrating workflows and connecting our clients' most important assets. And our AMG services further set us apart in the market. Our payer clients leverage our AMG providers to deliver high-quality care for members and also increasingly virtual primary care that improve access and reduces costs. Our provider clients look to make the most of their own teams while maintaining the highest standards for care and wait times. AMG provides a combination of critical bandwidth, clinical expertise, and load balancing provider services that are unique in the market today. Our partnering role is validated in the market. Our strategic clients, CVS, Elevance, the Leidos Partnership for Defense Health, and others, are powerful examples of organizations turning to us to help them achieve their goals. And while our largest clients give us validation, Amul expertise and value benefits a broad spectrum of clients. Our future-ready platform enables clients of all sizes to address the needs of today and expand to new use cases when they're ready. Our installed base of clients is a substantial baseline from which we intend to grow our company. And finally, at Amwell, we believe we are in the early innings, as healthcare has only just begun to modernize and leverage the benefits of technology-driven care. The market for enabling this is substantial. From where we sit today, we've never been more clear that at Amwell, we are unique in our approach to this market. Before Bob covers our financials, I'd like to share our key priorities for the coming year. With our healthy balance sheet, and improve financial visibility, we have high conviction in our path to profitability. We are laser focused on advancing towards profitability, supported by the following top three priorities. First, we will work to ensure a successful deployment of a broad portfolio of our solutions for the military health system. We will continue to execute on the initial phase of our implementation, demonstrate value, and support the DHA's enterprise expansion, which is anticipated late this year. Two, we will migrate the majority of our remaining clients onto Converge. Finally, our sights are set on re-accelerating bookings. We believe we've made the right moves to return to growth by expanding our footprint within our installed base and winning new clients. In 2024, we will continue to enable the digital aspirations of healthcare organizations with long-term profitable growth well within our sites. With that, I would like to turn the call over to Bob to review our financials, some key metrics, and our guidance.

Bob? Thank you, Ido, and good evening to everyone on the call. We begin the year in a position of strong visibility into our future growth and our path to profitability. Tonight, I will walk you through a few operating metrics and financial results from Q4, as well as our guidance for 2024. Then, given the near-term opportunity we have to meaningfully expand our revenue and profitability, I will provide you with additional transparency into our expectations for 2025, as well as our plan for adjusted EBITDA breakeven. To begin, total visits were approximately 1.65 million in the fourth quarter, a small decline versus 1.7 million last year. Last year's early and severe flu season did not repeat this year, so the relatively strong visit volume reflects growth within some of our strategic payer clients. Scheduled visits represented 60% of total, continuing to highlight the evolution of our company from provision of virtual urgent care to a platform provider enabling hybrid care. We continue to make good progress migrating our clients to Converge. After achieving our migrations goal for the year one quarter early, Q4 migrations temporarily leveled off as we teed up strategic payers for January launches. Visits on Converge were 52% for Q4. We successfully migrated some of our largest payer clients at quarter close. With their volume now on converge, that percentage is materially higher, and at the end of January stood at nearly 70%. We will report a formal visits on converge number for the quarter on our next earnings call, and we expect a steady stream of migrations to continue this year. Another important metric is our average annual contract value, or ACV, which is a good indicator of the success of our land and expand strategy. Health plan ACV was $902,000 and ACV for health systems was $415,000 in 2023. We look for ACV for both groups to expand as we grow our footprint within existing clients and add new clients over time. The number of active providers on our platform was 103,000 at the end of last year. After careful consideration, we plan to sunset this metric beginning in Q1. Active providers was initially conceived as an indicator that the activity on our platform in a post-COVID world was healthy and sustained. After growing from approximately 8,000 in late 2019 to almost 100,000 by the end of 2021, our number of active providers for the last eight quarters has remained steadily at or above the 100,000 level. With the majority of our volume now on Converge, we are finding that many of our clients are aiming to improve outcomes less by adding providers, but rather by increasing the number of patients each provider can care for by using our platform capabilities, including our automated care programs. Turning to our Q4 financials, total revenue was $71 million for the quarter, an increase of 14% to last quarter and down 11% from a year ago. Approximately $3 million of the decline in revenue versus last year was subscription-related, driven primarily by legacy platform declines with a balance split between lower visit and services and care points revenue. Subscription revenue declined slightly from Q3 and was $27.3 million in the fourth quarter. AMG visit revenue trended 8% lower than last year and was $32.1 million for the quarter. AMG visits were 10% lower this quarter versus a year ago, reflecting the early and severe flu season in 2022 and a return to a more normal onset of flu season in 2023. Average revenue per visit was slightly higher this quarter than last year at $72, driven by a mixed shift within AMG. Our services and care points revenue was $11.3 million for the quarter, an increase of $4.4 million from last quarter, driven primarily by an increase in professional services and marketing. These revenues can be uneven from quarter to quarter due to customer buying patterns for our marketing services programs and for care points, as well as the timing of professional services that precede deployments. Turning to profitability, our fourth quarter gross profit margin was 34%, flat to last quarter, and down from 42% last year. This was largely due to lower subscription software revenue combined with a revenue mix shift away from higher margin implementation services to lower margin marketing services. Recall that in 2022, Q4 was a professional services heavy quarter as we performed deployment work associated with a strategic client go live in January. Turning to operating expenses, we are applying ongoing cost discipline across our company that figures into our guidance. As a merit-based organization, our incentive compensation in 2023 reflected our revenue attainment, which was below plan. Our operating expenses reflect this and underlie a portion of our expense containment over the year. Further, since the end of 2023, we have reduced our headcount across the company by approximately 10%. We are tracking well on our path to the normalization of R&D spending. GAAP R&D expense was 5% below Q3, and was flat after adjusting for $1 million of software development capitalization associated with our DHA work. This brings the quarter and the year to down approximately 27% and 19% respectively compared to last year after adjusting for software capitalization. SG&A declined approximately 8% in Q4 and 18% overall in the second half of 2023 compared to the first half of the year. This is primarily due to lower stock-based compensation expense. Sales and marketing spend increased by $1 million, primarily due to severance costs, and G&A expense was 18% lower this quarter compared to last quarter, also on stock-based comp. We continue to streamline and rationalize our commercial headcount in keeping with the changes in our growth organization. We believe we do not need to spend more on SG&A to achieve our growth goals, and there is healthy operating leverage as we scale. Putting it all together, adjusted EBITDA for the quarter was negative $36.9 million, a 4% and 15% improvement on last quarter and last year, respectively. And transitioning to the balance sheet, we ended the fourth quarter with $372 million of cash in marketable securities. In conclusion, while our 2023 financials reflect the headwinds associated with our replatforming, we believe we are coming out the other side. Our business has moved meaningfully ahead in terms of putting in place our growth transformation, normalizing and rationalizing costs, and growing our contracted backlog. Turning to our outlook, the progress we made this year significantly adds to our financial visibility and meaningfully de-risks our path to profitability. The impact of our plan supporting the DHA, including the enterprise expansion, is not fully visible within a single year of guidance for 2024. So, we are taking the extra step tonight of providing a look at the growth and profitability we expect in 2025, and we will also provide some thoughts on our plan to reach adjusted EBITDA breakeven. First, I would like to provide our 2024 guidance. We expect revenue for 2024 to be in the range of $259 to $269 million for the year. We expect subscription revenue to be roughly similar to that of 2023. We expect visits to range from 1.6 to 1.7 million, and services and care points to be in the high single-digits percent of total revenue. Here are a few key assumptions we carefully assessed in arriving at our guidance range. The replatforming-related headwinds from prior periods will impact 2024 subscription revenue, which we expect to decline approximately 10% in the first quarter, then build back up with contracted go-lives. With respect to our DHA work, our plan is to implement the full portfolio of solutions at the initial five sites for the DHA over the year, with the enterprise rollout anticipated at the end of the year. As we have discussed, there are three separate go-lives in the initial deployment, so revenue will ramp over the course of the year. We've achieved the first milestone as planned. We expect little to no revenue from the enterprise expansion in 2024. we are assuming a gradual return of bookings growth as we finalize the transformation of our growth organization in the first half of the year. As to profitability, we expect our 2024 adjusted EBITDA to be in the range of negative 160 to negative $155 million. As for additional context around our assumptions, we are on track to reduce our converge-related R&D spending annually by 25 to 30%. This year, however, government-related customization of our platform will moderate the overall decline in R&D to a circa mid-teens percent reduction. Our headcount actions will result in over $15 million in compensation-related savings, though our guidance assumes we return to normal levels of incentive comp versus 2023. As we complete 2024 and move beyond the initial phase of deployment for the DHA and reaccelerate bookings, our financial story changes fairly dramatically in 2025. We currently expect revenue in 2025 to be in the range of $335 to $350 million, representing growth of circa 30% compared to 2024, primarily driven by go-lives of contracted software backlog including our planned enterprise-wide DHA deployment. Moving on to 2025 profitability, we expect an approximate 70% improvement in our adjusted EBITDA to a range of negative 45 to negative $35 million. We expect the change in our revenue mix towards subscription software to lift gross margins from the high 30% area in 2024 to over 50% in 2025. After customizing our platform for operation in the government ecosystem, it will be fully scalable and ready to deliver complete hybrid care across the entire military health system enterprise with minimal future development required. And finally, rounding out our forward-looking guidance, we currently expect to achieve adjusted EBITDA breakeven in 2026 with a cash and investments balance of approximately $150 million. In conclusion, we are encouraged by the strides we've made in our business. We believe we are just beginning to capitalize on our market opportunity, and this guidance marks the early days for the long-term profitable growth trajectory we envision. Thank you for listening. With that, I'd like to turn the call back to Ido for some closing remarks. Ido?