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spk00: Good afternoon and welcome to the Up Health Third Quarter Earnings Conference Call. I will now turn the call over to Reed Anderson from ICR.
spk03: Good afternoon and welcome to the Up Health Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal remarks. As a reminder, this conference is being recorded. On the call today from the company are Ramesh Balakrishnan, Chief Executive Officer, and Martin Beck, Chief Financial Officer. During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings, including the company's quarterly report on Form 10-Q and its various registration statements on Form S-1 and Form S-4 for a summary of the forward-looking statements and the risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. UpHealth cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise the statements to reflect new circumstances or unanticipated events that occur, except as required by law. Throughout today's call, we'll refer to pro forma revenues, pro forma gross margins, and adjusted EBITDA. These metrics are not determined in accordance with generally accepted accounting principles and, therefore, are susceptible to varying calculations. Definitions, calculations, and reconciliations to the financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of Uphill's financial results provide useful information regarding certain financial and business trends and the results of operations. Now, I'll turn the call over to Ramesh Velakrishnan, Chief Executive Officer.
spk01: Thank you, Reid. Welcome, everyone, to Uphill's Third Quarter 2021 earnings conference call, please refer to our website to review the presentation that captures our discussion today. Our first full quarter as a public company has been a time of tremendous growth and success as we boldly push the integration of our operations and consistently pursue our transformation to a global leading public digital health company. I am incredibly proud of what our team has achieved during an exceptionally strong third quarter. Our success is attributed directly to the hard work and dedication of all our people and the support of all our investors, clients, and partners. So I would also like to thank everyone who has been a part of the Up Health journey so far with us. Our CFO Martin Beck will go over financials in more detail At a high level, though, our third quarter results exceeded projections, and we also convincingly demonstrated the clear value and differentiators of the Uphold model as we come together as one company in our first full reporting quarter as a public company. Some highlights. Our revenues exceeded expectations. and we report $49.1 million, a 25% increase over last quarter's pro forma revenues. We expanded gross margins from 36% to 40%, an 11% improvement from last quarter. We continue to be profitable with adjusted EBITDA of $5 million, an increase from $2.3 million last quarter. And with our recent capital raise in October, we strengthened our balance sheets, secure the working capital we need for continued and ambitious growth through all of 2022. So we are now focused on continuing to execute on our core mission to create a new architecture for healthcare internationally with a unique, unparalleled offering in the market and bringing value to our shareholders. This is our focus. And we also expand globally and continue to drive meaningful growth and enhance profitability. So we reiterate our financial projections for 2021 to meet and exceed revenue of $180 million and adjusted EBITDA of $16 to $20 million before public company expenses. With more than 50 percent revenue growth expected this year versus last year, from $117 million to $180 million, we are confident projecting continued revenue growth of approximately 50 percent again next year. Before I turn the call over to Martin, I'd like to touch on three things, our key offerings, our growth strategy, and integration status in that order. At its core, UP Health provides technology and technology-enabled services to manage health. Our approach brings together three highly scalable offerings as part of one comprehensive suite of solutions, integrated care management, virtual care infrastructure, and service. There is no other provider in the market that delivers these full capabilities in one combined offering. a comprehensive foundation to transform how we deliver care and manage health here in the U.S. in emerging economies and at global scale. Unlike many digital health companies that are attempting to create alternative delivery systems on the side, we come as partners to manage care organizations, providers, and governments in the digital transformation of healthcare. So there are companies that intersect with some of our solutions, but UpHealth is unique in the total scope of what we bring, in the breadth and the comprehensiveness of the technology infrastructure and services we can deploy to create integrated systems of care. The first of our core offerings is our integrated care platform called Centronet. The platform is designed to enable our clients to create an integrated care community, and it serves as the technology backbone for Op Health. Centronet integrates information to create 360-degree views of patients and providers, uses advanced analytics to stratify populations, better understand what is happening with their health and other needs, and coordinates care teams to manage a wide range of health programs. Centranet integrates with our other offerings, with our virtual care infrastructure and services, and this integration will allow us to significantly expand cross-selling opportunities. In Q3, we want a significant contract in California to deploy Centranet for the largest specialty mental health plan in the state. Some of our clients using CentraNet already include the County of Alameda, LA Care Health Plan, and the California Mental Health Services Authority. In Q3, we also completed platform extensions to CentraNet that support a very ambitious initiative in California called CalAIM to better manage health for individuals with complex medical, behavioral health, and social needs. And we grew the population of the platform from around 6.8 million to almost 7.1 million. Our second offering is our virtual care infrastructure. This infrastructure allows clients to extend access to care and care teams with video endpoints, complete exams with connected IoT, diagnostics, and advanced clinical decision support systems. For our domestic business, we package and deploy this infrastructure as our multi-platform with video endpoints that will include remote monitoring and diagnostics as well. For our international business, we package the infrastructure with our Hello Life platform with standalone digital clinics and acute care digital hospitals with substantially expanded capabilities to support full diagnostic primary, and acute care visits, including imaging, labs, and medications. In Q3, we expanded the U.S. footprint for the HIPAA-compliant MARTI virtual care platform, and we currently support 168,000 encounters per month, over 26,000 video endpoints, at over 2,100 health locations in the U.S. We also recorded our largest volume of use of MARTI with over 7.4 million minutes of consultations. This is compared with 6.1 million minutes in Q2 and 4.6 million in Q3 of 2020. With our domestic virtual care infrastructure business, we added contracts with Robert W. Johnson-Bernabas, IU Health System, and AccessPoint Health, with an annual contract value of $5.5 million and a total value over 26 months of $16.5 million. We also opened Spanish interpretation operations in Colombia and expanded operations in Peru to meet increased demand. With our virtual care infrastructure, we completed installation of 550 digital clinics in Madhya Pradesh, and 250 of them are currently operational. With these clinics, we will eventually serve a population of almost 25 million. We are also very proud to report that we deployed our first Hello Life fully digital hospital in this quarter in Nagaland, India. This is a truly revolutionary offering. And with it, we extend our virtual care infrastructure to include acute and critical care in inpatient settings. So Hello Life, the Hello Life infrastructure allows seamless delivery of health from the home of the patient to hospitalizations and post hospitalization. The digital hospital is the first of its kind. It allows physicians to remotely examine patients, not just with consultations, but with much expanded capabilities to view infused medications, monitor ventilator flow, conduct physical examinations with connected endoscopes, EKGs, other diagnostic devices, complete bedside tests, and prescribe medications remotely. In Q3, we also contracted to install and deploy 260 digital clinics in the Democratic Republic of Congo and are underway with the build-out of these. The DRC contract value was $66 million over five years. So UpHealth digital clinics offer the ability to provide a full patient encounter complete with physical exams, diagnostic testing, and pharmacy dispensing, and it is a clear example of how A telehealth-enabled, digital-first, reproducible model can improve quality of care very efficiently globally. Our third offering is our services line. The uphouse platforms and infrastructure are designed to onboard a wide range of provider networks and make them available virtually at the point of care. Today, we provide a core set of in-house services, and these include, first, market-leading language interpretation with our HIPAA-compliant market platform and medically-trained interpreters. Second, medications with a full-service retail and compounding pharmacy licensed in 50 states and D.C. In Q3, we introduced new prescriptive direct, a new service to deliver physician-recommended supplements that extends our leadership in the management of health with personalized protocols. A third service area for us is behavioral health services, where we are in the process of integrating psychiatry and medical services with a full continuum of mental health treatment capabilities to create a comprehensive care model for behavioral health. This is what we offer the market. In Q3, we expanded contracts to deliver behavioral health services to include community care, life and health care for first responders and other groups. We also credentialed additional facility to deliver mental health programs for veterans. Turning now to our growth strategy, we continue to advance growth at a significant pace with five key focus areas. First focus, we are continuing to implement contracts across all our solution offerings. Second focus, we will include the communication and collaboration infrastructure provided by MARTI, the virtual care platform, with the CentraNet integrated care platform. And the first use case for this will be to bring language services to existing clients who are on the integrated care platform. Our third focus is to capitalize on cross-selling opportunities. We will combine the integrated care platform, CentraNet, with our expertise to manage health programs and For example, use our experience delivering and managing behavioral health services to support health plans, manage whole person care programs, and other similar initiatives. We will also bring additional value to our existing client base across 2,100 healthcare facilities, specifically in areas of information integration, deeper analytics, and care management with prescriptive guidance. A fourth focus area for growth is to develop strategic partnership opportunities to deliver services such as language and medication management to other digital health company partners. Near-term focus will be on embedding language services for delivery into the acute care space and expanding medication management for health plan clients. And final growth focus area As an expansion of our business model, we will broaden the virtual care infrastructure to create a very compelling, reproducible model for emerging markets to deliver acute care with fully digital hospitals and hybrid clinical teams. As part of the consolidation and building of our global Upheld offering, we strengthened the leadership team and added two new members. Mike Roller joined us from the Livongo side of Teladoc as Chief Revenue Officer. Sarah Unquest joined us from Beacon Health Options as SVP of Integrated Behavioral Health. We are really delighted to have both of them on the team. Each of them will significantly advance and transform their areas of business focus. In close partnership with our Board of Directors, We also engaged top advisory industry leaders, Ketchum, global marketing and communication firms, to help us bring up health message in a compelling way to the market and to increase our visibility. Mazars to implement a comprehensive compliance program across all of up health. And the national leading management and transformation firm, to accelerate our integration and go-to-market initiatives. The goal of these engagements is to continue to enhance the integration and consolidation of our global entities and to maximize the synergy and creation of value across all of our countries. So to summarize then, our third quarter has been exceptionally strong, financially exceeding projections on revenue growth, and profitability and continuing the transformation of the company into coherent global public enterprise. I can say confidently that we are solidly positioned to execute and meet financial targets for the rest of 2021 and drive continuous and profitable growth into 2022. We increased our number of clients, contracts, and revenue. We introduced new breakthrough products and we continue progress on our integration initiative. We are excited about the future. We are well capitalized to become a leading force in digital health and have an unmatched combination of technology, infrastructure, and services that we bring to our clients. With that, I will turn the call over to Martin to go into more detail on our financials.
spk02: Thanks very much, Ramesh. We appreciate everyone joining us today. Before I begin my review of our third quarter results, I want to first comment on the presentation as it pertains to the absence of results in comparison period. Recall that we completed the merger with Gig Capital II on June 9th. It was only from that date forward that we have consolidated results that we can report on a GAAP basis. Due to timing factors related to the various business combination transactions encompassing multiple entities, as well as the global scope of our operations, it was not possible to provide consolidated GAAP or pro forma results that were sufficiently complete for all of the year-earlier periods. This is the first full quarter that upheld financial statements include all the businesses combined in the June 9th transaction. Accordingly, we are only able to share results for the three, six, and nine-month periods ending September 30th, 2021, with you today. However, I will provide some additional context where possible to help you better understand our overall performance. I'll start with a review of our results on a gap basis and will include pro forma comparisons where appropriate. Revenues for the third quarter of 2021 were $49.1 million, which exceeded expectations. Historically, we reported the company's revenue and gross margins on a business unit basis to provide continuity with historical results. As we have advanced with the integration and alignment of the businesses, we think it's important to show the company as it is now operating, which is along three business lines. First, integrated care management. Second, virtual care infrastructure. And third, services, which includes the digital pharmacy and behavioral health business units. Looking at third quarter revenue broken down by segment on a gap basis, Virtual care infrastructure was the largest contributor with $19.2 million of revenue, or 39.1% of total revenue. Services, which again includes our digital pharmacy and behavioral health businesses, had gap revenue of $18 million, or 36.6% of the third quarter total. Finally, integrated care management had third quarter revenues of $11.9 million, or 24.2% of the total. On a geographic basis, 65% of third quarter revenues came from the United States, 16% from Europe, and 19% from Asia and Africa. Third quarter revenues were not markedly affected by COVID-19 in any of our operating jurisdictions, though we have experienced labor supply issues in our behavioral health business, and it's possible that supply chain issues could impact the rollout of digital infrastructure assets in India. While we are not able to offer complete year-earlier pro forma revenue figures for comparison, let me provide a little color on the trends we saw within the various segments to give you a better sense of overall performance. On a pro forma basis, total revenues increased 28% from Q1 to Q2 2021 and increased another 25% from Q2 to Q3 2021. Upheld's year-to-date September 30 2021 pro forma revenues of $118.8 million were approximately 38% higher than the combined unaudited pro forma revenues for the same period in 2020. The largest revenue growth in Q3 came in our virtual care infrastructure business line, which saw revenues grow from $12.4 million pro forma in Q2 to $19.2 million in Q3, an increase of 55%. The company's revenue mix continues to shift towards the higher margin integrated care management and virtual care infrastructure businesses. Those two business lines increased from 48% of total pro forma 2020 revenues to over 60% of year-to-date Q3 2021 pro forma revenues and to over 63% of third quarter revenues. Gross margin on a gap basis was 40% during the quarter, and margins by segment were as follows. integrated care management, 40%, virtual care infrastructure, 40%, and services, 41%. We view gross margin as a key metric for UpHealth and as being useful for comparing our results to our peers. UpHealth's Q3 gross margin of 40% was an increase of nearly 11% from the company's pro forma gross margin of 36% in the second quarter. This improvement stemmed largely from increased volumes in the U.S. telehealth in behavioral health businesses and as a result of mixed factors in the integrated care management business line, factors which we discussed during last quarter's call. Third quarter net income on a GAAP basis was $32.6 million. This included a $49.9 million reduction from $61.8 million as of June 30th to $11.9 million as of September 30th in the fair value of the derivative liability associated with the convertible notes as a result of changes in the company's stock price during the quarter. The reduction in the derivative liability was recorded as a gain on fair value of derivative liability, a component of other income in the company's consolidated statements of operations. Uphill's third quarter adjusted EBITDA was $5 million, which exceeded expectations and which was more than double our Q2 pro forma EBITDA. In addition to residual transaction-related expenses, adjustments were made to EBITDA for various lease abandonment expenses. As a reminder, adjusted EBITDA is a non-GAAP measure, and we have included a reconciliation of GAAP net earnings to adjusted EBITDA in the press release. I want to spend a few minutes discussing the company's liquidity position. As of September 30, 2021, UpHealth had a cash balance of approximately $68 million. The company had short-term debt instruments, including notes to shareholders and a forward share purchase agreement, which together totaled approximately $51 million, excluding the current portion of the derivative liability, and a $160 million convertible note. We raised approximately $43 million from the issuance of approximately 26.5 million shares of common stock, subsequent to the close of the third quarter. This issuance substantially increased the company's free float, and increased the total number of outstanding shares to approximately $144 million. Proceeds of the equity offering will enable UpHealth to satisfy its short-term liabilities and to fund ongoing working capital and capital expenditure requirements associated with the company's continued growth. Pro forma for the equity offering, the company would have had approximately $111 million of cash on the balance sheet as of September 30th. and will retain sufficient liquidity as it continues to invest capital to fund growth and excessive cash flow from operations through at least the second quarter of 2022. We continue to make excellent progress in integrating our operations. Our operating plan calls for the selective integration and expansion of various sales and marketing functions and for the consolidation of certain business process functions, including financial systems and reporting capabilities. This work is proceeding according to our internal schedules. We've built out a strong and experienced finance and accounting team. We've completed the first phase of our workday implementation at the uphouse level and are in the process of implementing workday at the three business lines. We are currently consolidating employee benefits and our insurance spend across the business lines and have recently closed or significantly reduced our footprint at six locations in the U.S. and Puerto Rico. These cost-cutting activities will be supplemented by additional reductions in operating expenses and we'll be able to provide more details on the scope and magnitude of both our revenue and cost synergies once we complete our 2022 budgeting process. As Ramesh stated, we reiterate our financial projections for 2021 of revenues of $180 million and adjusted EBITDA of $16 to $20 million before public company expenses. That concludes our prepared remarks. Operator, we're now ready to take questions.
spk00: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, you can press star followed by 2 to cancel your request. When preparing to ask your question, please ensure that your phone is unmuted locally. Our first question comes from Mike Latimore of Northland Capital Merchants. Mike, your line is open. Please go ahead.
spk04: Yeah, good afternoon, and congratulations on the quarter. Great to see another quarter of strong execution there post-merger. You know, in the third quarter here, the virtual care infrastructure grew quite a bit sequentially. Can you just provide a little more detail on that? You know, is it more related to the U.S. or international markets? And should we think of that as sort of a recurring business, you know, maybe that forms a base off of which you can build in the fourth quarter?
spk01: Mike, thank you for participating and thanks for the question. As you know, the virtual care infrastructure is is a high growth area for Up Health. And what we see in Q3, which we expect to continue, is growth both in the U.S. and the international markets, and this is recurring growth. What you saw was a continued expansion of the utilization of the infrastructure in the U.S. with existing clients, expanding the number of minutes, expanding the number of encounters, as well as addition of some really marquee new logos as well. And we anticipate that will continue to expand, even more so when we bring in some of the synergistic offerings. In the international market, what you saw in Q3 is the deployment of the large contract in Madhya Pradesh and the expansion into Africa just at the beginning of that, with the Democratic Republic of Congo. What we see here in the international market is a recurring model and an expanding model, both with the delivery of the infrastructure and the ongoing recurring services they support as we service these populations. And of course, we cannot underestimate the absolute tremendous revolutionary nature of the of the new digital hospital, which is also creating substantial expansion opportunities for us.
spk04: Great, great. And just thinking about the model broadly, is there sort of natural seasonality in the business such that you'd expect more spending or year-end spending like in fourth quarters, or is that not natural in this business?
spk01: We don't have any marked similarity, Mike, in this business. Sorry, seasonality. As you know, both these models are driven by the need for care, both in the U.S. and internationally, and more so the move by our customers and clients to these new models where we where a virtual care infrastructure can bring not only access to care, but also access to expanded care teams. So no seasonality substantially in these businesses.
spk04: Got it. And then just last on the – in one of your filings, you talked about $154 million of – virtual care or virtual infrastructure business that you could see, recognize over, you know, the next 18 months or so. I guess, can you talk about a little bit more about the catalyst for recognizing that business and visibility into doing so?
spk01: You know, thanks for the Mike. I'll ask Martin to respond to the detail on that.
spk02: Hi, Mike. How are you? You're joining us. Yeah, the As you look at the business, both the integrated care management and the virtual care infrastructure business lines, which together constituted about 63% of Q3 revenues, are contractually driven businesses. That gives us very strong visibility into future revenues. We haven't published backlog information at this point, but I can say that from an overall business perspective, we're about where we were at this time last year in terms of the percentage of forward year revenue that's already under contract. And the contract that you're referencing would fall squarely into that bucket. We have the contract, and it's about execution on that contract, which we're well underway on.
spk04: Okay. All right, great. Well, congratulations. Good luck across the year.
spk01: Thank you very much, Mike.
spk00: Thank you, Mike. Our next question comes from Mike Vederhorn of Oppenheimer & Co. Mike, your line is open. Please proceed.
spk06: Thank you. Congrats on the quarter. A couple of questions. One, can you discuss the trajectory of revenues by segment heading into 2022? And also can you touch on, you know, kind of how we should be thinking about margins for next year as well? And then overall, kind of if you can kind of, you know, kind of give us the layout of like the tailwinds and headwinds for next year as well as we turn the corner here.
spk01: Thanks very much, Mike, for participating in the question. I'm going to turn that over to Martin Beck to answer that.
spk02: Hi, Mike. How are you?
spk01: Hey, good. How are you doing?
spk02: Good, thanks. Yeah, so if you look at the revenue mix of the business and think about that in terms of trajectory going forward, we've seen an increasing mix and growth in the integrated care management and value add – integrated care management, and virtual care infrastructure segments. Those segments in 2020 constituted about 48% of total revenues. In the third quarter, they constituted 63% of total revenues. So that's where the growth is coming, and we would expect to continue to see that increased rate of growth in those two business lines. Those business lines tend to have the higher margins as well, and so we were very happy with the progress in the gross margin, an improvement of 11% from Q2 to Q3 on a pro forma basis. We would expect that that gross margin would continue to improve as the revenue mix improves.
spk06: Okay, great. Also, can you discuss post, obviously, the capital raise, the positioning of the balance sheet as we think about 2022, the puts and takes into that, and how we should be thinking about cash flow, your timing around turning positive on that front as well?
spk01: Sure. Thanks, Mike. I'll ask Mike Martin to address that again as well. Thanks.
spk02: So if you look at the queue, we have had about $68 million worth of cash on the balance sheet as of 9-30. We engaged in an equity offering that added about $43 million of cash to the balance sheet. So sort of on a pro forma basis, we would have had approximately $111 million of cash on the balance sheet as of September 30th, again, pro forma for the equity offering. We'll retain sufficient liquidity as we continue to invest to fund growth in excessive cash flow from operations through at least the second quarter of 2022, when we would expect the business to start to generate positive operating cash flow. And Mike, that assumes with continued growth of the business at the rate that we've outlined. If we are able to grow faster with the proviso that we want to do it in a way that generates positive EBITDA, but if the growth rates tend to be a little bit higher than we are currently projecting, we may need a little bit more working capital to fund that. as it stands right now, we would see the liquidity being sufficient well into the second quarter of 2022. Thanks.
spk06: I appreciate the call today and congrats again.
spk01: Thank you very much, Mike.
spk00: Thank you, Mike. Our next question comes from Frank of Lake Street. Frank, your line is open.
spk07: Thanks for taking my questions. I wanted to come back to predictability just one more time. I heard your 63% are contractually driven businesses, and I heard you kind of reference what percent of... next year's revenue is kind of in hand, recurring in nature, but maybe just go top down for us what's giving you the confidence to stand by that 50% growth rate next year and how much of that you feel is contracted and already in place and how much more you need to get in the door to reach or exceed that number next year.
spk01: Frank, thanks for joining. Thanks for the question. I'll start this out and then add it over to Martin. So if you look at the contracted businesses, virtual care and the integrated care platform, these are multi-contracts that are based on metrics that expand year over year. So if you look at the virtual care platform in the U.S., the expansion comes from an ongoing increase in the minutes of utilization as well as encounters and within the existing customers, which are multi-year contracts, and the adding of new logos. So based on the pipeline, based on the expansion, based on the uptake and utilization, that's what's behind the confidence and the predictability that we've been projecting. In the international side, the best way to think about this is once we've deployed these digital clinics in a catchment area, there is an ongoing expanding revenue stream from the services they enable because we've essentially got a population that is assigned to us and are progressively serving more and more of the population, and that's an ongoing stream. Those are also multi-year contracts. They're there, the population is there, and the dynamics are such that it's highly predictable and growth-oriented. So those in the virtual care infrastructure, the dynamics behind, the predictability of the numbers and the modeling that we've provided. On the integrated care platform, it's a similar dynamic, multi-year contracts based on populations, and there's a two-tier here with just the expansion of the population within these integrated care communities we create, but also an expansion of the population that gets enrolled in a number of these programs which we support and enable, which results in an added PMPM within that overall population. So both those elements, the total number of population on the platform and the expansion of initiatives that we're supporting are expanding. And when we look at the further drivers of growth, which are moving the health systems and managed care into these new models of care, that's where we get the confidence in the growth rate that we're projecting.
spk07: Perfect. That's really helpful. My follow-up, I wanted to touch on that second piece of the integrated care growth. You spoke to the expansion of population that's getting enrolled in these programs. Can you just walk through an example and just try and illustrate for us just how impactful that can be when you transition somebody into one of these programs?
spk01: Sure. Thank you, Frank. I'll give you an example. If you take the county of Alameda, there's 1.7 million lives in that, there's about 1.4 plus on the platform. Now, there's a number of programs, and there are programs to manage individuals who are homeless. There are programs to manage individuals who have specific complex conditions, behavioral health conditions, and so on. And the ratio, so if we charge X amount dollars per member per month for the general population overall, that can increase 10 times when that individual moves into a specific program. So even if we didn't grow the population as we move the individual into these programs, the revenue side of it can have that potential of up to a 10 times additional PMPM. Does that answer your question, Frank?
spk07: Yeah, that's perfect. Very helpful. I'll stop there. Thanks for taking my questions and congrats on all the progress. Thank you, Frank. Thanks, Frank.
spk00: Thank you, Frank. Our next question today comes from Bill Sutherland of the Benchmark Company. Bill, your line is open. Please go ahead.
spk08: Thank you. Martin Ramesh. Good evening. I wanted to look at the services line just for a second at the gross margin. And just a major step up, quarter over quarter.
spk01: If you could give us a little color behind that. Thanks, Bill, for joining. Thanks for the question. I'll ask Martin to talk to that. Martin?
spk02: Hi, Bill. We were pleased with the uptick in gross margins at the services line. As we discussed on our last call, we expected some improvement in that gross margin on the heels of stronger volumes, particularly on the U.S. behavioral health business. So we saw that come to fruition, and that really drove a good bit of the improvement.
spk08: And is that a number that we should think about going forward and then conversely, I know that there's been a little pressure on integrated care's gross margin because of the European implementation. Does that go – is 40 the way to think about integrated care, or is that a higher number as in the past?
spk01: Let me address that, Bill. So that is – the best way to think about integrated care and the margins is that – The margins are depressed a little when we're creating these new reference configurations. And once that's in place, they go back to – so the European initiative represented a new model, reference model. We certainly expect those margins to start to go back up as we get into the next phases of that contract. In terms of ongoing expansion of the services margin. Martin, you want to add to that?
spk02: Yeah, certainly. Look, Bill, you saw our overall margins on a gross margin basis move from 36 to 40. Part of that is mixed. Part of it is improvement in the services line. We expect continued strong growth in the two really higher margin segments on a normalized basis. that's integrated care management and virtual care infrastructure. So we think that'll provide a lift to the overall gross margin going forward. And, you know, we would hope to keep the services margin, you know, in the high 30s, low 40s on a consistent basis going forward.
spk08: Okay. So that's the shift that'll continue the improvement in gross margin hopefully going forward. One more I was thinking about is the outlook for the international business. I'm sorry, the international virtual care business. Can you tell us a little bit about the financial characteristics when you're in a deployment phase versus when you move to operating the clinics? Does that change? I guess, the margin profile.
spk01: Let me address that, Bill, and then I'll ask Martin to add to it. So both phases are high-margin businesses for the international virtual care infrastructure and services business. The shift, so we target margins in the deployment of the infrastructure itself. and Martin can get into the numbers there. Ongoing, operationally, essentially what happens is that we are shifting to a services, recurring services model, which is also generating substantial margins relatively. So the dynamics are a shift from margins on the deployment of the infrastructure to margins on the deployment and provision of ongoing recurring services. That's the structural characteristic in the phase. But as I mentioned, both those phases are targeted at good margins for us. Anything you want to add to that?
spk02: Yeah, I think that was exactly right, Ramesh. So, you know, on the infrastructure side of things, Bill, we make a margin, and it's a very healthy margin, and then we make a healthy margin on the services side. There's obviously a ramp-up on the services side as volumes increase, and so that margin on the services side will start at a relatively modest margin. level and ramp up over time. And that's the importance of having a number of these different contractual vehicles at different stages in their life going forward.
spk08: And then last for me, I know there's a lot of opportunities out there for the virtual model internationally. Can you give us a sense of the opportunity pipeline that you all are working on?
spk01: The sense is, I mean, if you ask the internal team, it's like infinite demand is how we would put it. So it's really a question of how much can be fulfilled. The pipeline can be, the pipeline is much more massive. So it's not the constraining side of the equation here. It's really how much working capital they would want to deploy, to sustain what level of growth. But this is a breakthrough model for the emerging economies, a new model for infrastructure and how you can deliver not just primary care, but even acute care. And there is just a tremendous interest in leapfrogging legacy and things that we've done in the past to what is really a very exciting 21st century digital first model for these countries who are just in the process of expanding investments in healthcare infrastructure and healthcare benefits. So the demand is created by both those factors, and having a new model is a perfect match for the demand.
spk08: Right. Okay. Thank you both for the color. Have a good evening. Thanks, Bill. Thank you, Bill.
spk00: Thank you, Bill. Our final question comes from Matt Ripperger of Harvard Stoneview. Matt, please go ahead.
spk05: Yes, thanks for taking the question. Just a couple questions. On the CalAIM relationship, Do you mind giving some framework in terms of how you're working with them now, how big the membership population is, and how you're contracting with that Medicaid program in innovative California?
spk01: Matt, thanks for joining us, and thanks for the question. So as you know, CalAIM is a program that kicks in next year. It builds upon programs that have been deployed – Up to now, it builds upon whole person care. It builds upon health homes. And the purpose of the program is to demonstrate a new way to manage the Medicaid population that is at the heart of the challenge with providing health care to that population. It's individuals with complex medical conditions, behavioral health, and social factors affecting their health. So what we are focused on is expanding our BCHAT in the largest plan participating in CalAIM, which is LA Care Health Plan, as well as working with some of their provider networks. And what we are initially focused on is the expansion within our largest Medicaid plan in the state, actually in the country, and expanding from there into the provider network and additional plans that are part of that whole initiative.
spk05: And just to drill down a little further, if I could, Remind me how many members are in the CalAIM program and how many members potentially could you be contracted with through the plans that you work with in 22?
spk01: So the entire California Medicaid population, which is in I think it's 12 or 13 million, is in the CalAIM program. Currently we are serving somewhere in the 2.5 to 3 million members in that program. And we expect to expand that to account for close to 50% of the population under that program as it rolls out.
spk05: Got it. So call it 6 to 7 million as it rolls out. And you'll be contracting with them on a negotiated PMPM basis? That is correct.
spk01: And will you be taking risks under those contracts? We will not be taking risks under those contracts, but at least not yet. We are looking at arrangements as we add services to help manage health programs at models where we could participate in certain incentives attached to outcomes and other metrics that we can help move.
spk05: Got it. Is there a preliminary PMPM we could assume for that six to seven million lives?
spk01: That's part of our pricing model, so we don't disclose that. There is another growth element, Matt, which is related to the overall expansion of Medicaid itself within the state, as you know, and that's across the whole country. So the population under Medicaid is also growing. Got it.
spk05: Okay. Great. Thank you. And then a second question I had is related to the direct contracting program with Medicare. What are your overall views of that program, and are there ways that you can participate in that through partnering with provider groups who are taking risks or health plans in the DCE area?
spk01: Yes, absolutely. So one of the reasons that we use the word managed care organization as our target customer is that there are many flavors of that kind of organization. Traditional health plans, providers in various risk-based and delegated arrangements, but also entities like the DCE, direct contracting entity, as well as flavors of accountable care organizations. These are all target customers for us, and exactly the set of capabilities that would bring to a health plan, we would bring to the DCE as well, both in terms of technology and infrastructure and as we outlined, value-added services to help them manage programs and metrics that they need to hit as part of that DCE program. Got it.
spk05: But again, this would be a case where a DCE would then share some of the PMPM with you on a non-risk basis as you expand the membership base that you're sort of indirectly contracting with.
spk01: That is correct.
spk05: Got it. And that would kick in in 22 as well.
spk01: We haven't explicitly modeled an expansion into DCEs, Matt, but it's one of the targets in the managed care expansion in 22 that we are modeling.
spk05: Got it. So that would be incremental to the 50% revenue growth that you spoke to for 22 preliminarily? That is correct. Okay. And just the last question I had is, I know you guys have invested materially in building out this this platform, this IT and digital platform, I think in the range of $100 million over a decade or so. Correct me if I'm wrong. But is there any other material investment that you need to make to be competitive or to have the most comprehensive solution going to market in 2022?
spk01: We have made substantial investments in dollars recently. But also, we have some very innovative breakthroughs that we've made in how the platform is designed, built around this concept of an integrated care community. The major elements of investments we need to make on the platform are behind us. The core functions are in place, but we do have, as with technology, ongoing enhancements, ongoing build-out of reference models, rules, protocols, guidelines, assessments that we will continue to keep ahead of technology, you know, competitors.
spk05: Got it. A bit more along maintenance, CapEx type of investment.
spk01: Some of it, yeah, I would say it's ongoing enhancements continuous improvement of the platform. Got it.
spk05: Okay. Thank you very much.
spk00: Thank you, Matt. This concludes today's Q&A session. I would like to hand you back to Ramesh for any closing remarks.
spk01: Thank you very much. I want to thank everybody for joining us today and just state again that we are very, very proud of what we have been able to do in Q3 with not just the financial growth, but the growth in customers, contracts, new products that we have introduced. We are poised with capital for growth, very optimistic and confident in being able to create a leading digital health company in the market. So thank you all for participating today.
spk00: This concludes the Uphill's third quarter earnings conference call. Thank you all for joining. We hope you have a great rest of your day. You may now disconnect your lines.
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