Yahoo Finance American Well Corporation (NYSE:AMWL) Q1 2024 Earnings Call Transcript
American Well Corporation (NYSE:AMWL) Q1 2024 Earnings Call Transcript May 5, 2024
American Well Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amwell Q1 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Sue Dooley, Head of Investor Relations with Amwell. You may begin.
Sue Dooley: Hello, everyone. Welcome to Amwell's conference call to discuss our first fiscal quarter of 2024. 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 a replay will be archived. Before we begin our prepared remarks, I'd like to take this opportunity to remind you that during the course of the call, we will make forward-looking statements regarding projected operating results and anticipated market opportunities.
This forward-looking information is subject to the risks and uncertainties described in our filings with the SEC, and actual results or events may differ materially. Except as required by law, we undertake no obligation to update or revise these forward-looking statements. On this call, we'll refer to both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. With that, I would like to turn the call over to Ido.
Ido Schoenberg: Thank you, Sue, and hello, everyone. I'm pleased to report that Q1 was a busy quarter for our company, one that provided a strong start for an important year for us. As a reminder, on our last call, we shared our guidance for a step function in our growth that will help us achieve our profitability goal in 2026. Before I share some highlights on our first quarter, I would like to open with a few general comments. It is now clear that the need for digital care enablement is significant. It is also clear that Converge is performing well and powers sophisticated solutions across diversified clients on a large scale. And finally, it is evident that new large customers are recognizing the value of our platform as reflected by the size and revenue mix of our recent wins.
Importantly, as we deploy our offering in the government sector, modernizing the military health system, we also expand into a new sizable market. In addition, we believe that implementing our platform in the demanding government environment is demonstrating important proof points that are also relevant in our existing commercial markets. Those include scale, versatility and cybersecurity capabilities that will shine a spotlight on our market differentiation across all our segments. During the past three months, we have taken major steps to adapt and transform our organization that will result in a greatly reduced cost structure as reflected in our forward guidance. In addition, we have good visibility into strong top line growth in 2025, coupled with greatly improved margins.
The guidance we gave on our last call described a 30% jump in our 2025 top line, reach with subscription software that will drive gross margin expansion to over 50%. We believe this is a clear indication of the completion of our re-platforming investment period. We believe our technology offering is unique and will continue to drive favorable high-margin software revenue mix, and our strong balance sheet fuels us well beyond our needs to achieve profitability. We are proud of our many clients, big and small, that are now committed to and utilizing Converge as their platform. Converge connects their health care services with millions of health care consumers. It drives efficiencies and fuels new revenue opportunities for them on a foundation of very high user satisfaction scores and NPS ratings.
The market for digital health is just starting, and we are well positioned to benefit. What we do is complicated. The value to patients, providers and payers is significant, and we believe our deep integrations and vast deployments from long-term bonds with health organizations make up a big part of the U.S. ecosystem. We are proud of what we accomplished in the past three years and believe it is beginning to pay off. And now I would like to review some highlights from Q1. First, we are delivering for our clients. In addition to the successful go-lives and migrations we completed this quarter for several clients, we are steadily completing critical milestones as we deploy our solution for the military health system, working alongside the latest partnership for Defense Health.
Following our successful rollout of our digital behavioral health solution in Q1, we are now targeting the next capability offering go-live for Q3. Our efforts are on schedule, and we look forward to supporting the MHS in their full enterprise deployment of our solution scheduled for Q4. Interest in the work we're doing together with the DHA is growing. Early in Q1, in its health.mil website, the DHA also announced its launch of our digital behavioral health solutions at the beginning of its journey. Also recently, an article for Modern Healthcare described the DHA's commitment to modernization with our offering at its core. Second, we solidified important initiatives in our growth organization aimed at reaccelerating our bookings and increasing our mix of subscription software revenue.
Our growth org is embracing the changes we have put in place and tonight, I will share an example of our booking success. Third, we continue to drive for efficiency. We are optimizing our company by instituting a cost structure that provides a baseline for meaningful profit expansion as our growth scales. In a very active Q1, we successfully migrated a large portion of our visit volume onto our Converge platform via some of the most strategic payer migrations, including previously announced Elevance and Highmark. Visits on Converge were nearly 70% in Q1, meaningfully higher than 54% in Q4. Our platform is scaling and performing well and client feedback remains strong, with funds operating consistently well over 90%. Now, I would like to provide some color around the successful Q1 client expansion, demonstrating the growth potential within our existing client base.
We have a sizable expansion with an existing East Coast Blue payer client that will deploy several of our automated programs to drive engagement, reduce costs and compete for members in a crowded regional market for health insurance. Leveraging our programs, this payer intends to identify high-risk members and proactively encourage them to engage with high-value care programs like diabetes management. We also had a good quarter for client renewals, including Highmark, Intermountain, El Camino Health, Penn State and Cleveland Clinic. Concluding my discussions on our growth initiatives, we think we have the right team structure in place, and engagement with existing and prospective clients is high. We've completed detailed client reviews and creating rigorous account plans with metrics and compensation plans that emphasize a high-value ROI selling approach and a focus on selling subscription software.
Our new working team's embracing the robust enterprise selling motion, which we believe will accelerate our growth, fueled by demand for our hybrid care expertise and a differentiated approach, enabling hybrid care delivery across the health care landscape. Based on these achievements, we continue into 2024 with high conviction regarding our guidance for meaningful growth next year and our plan to achieve profitability in 2026. With that, I would like to turn the call over to Bob to review our financials, some key metrics and our guidance. Bob?
Robert Shepardson: Thanks, Ido, and good evening to everybody on the call. We ended the first quarter in a position of continued strong visibility into our future growth and our path to adjusted EBITDA breakeven. Tonight, I will walk you through a few operating metrics and financial results from the first quarter, then I will review our guidance for 2024 as well as our expectations for 2025 and 2026. To begin, total visits were approximately 1.67 million in the first quarter, a small decline versus 1.7 million last year. Visit volume this quarter was negatively impacted by two onetime events: first, the Change Healthcare security breach; and second, a temporary disruption associated with our largest client migrations to Converge to date.
We resolved those issues before quarter end. Scheduled visits represented 63% of total, continuing to highlight the evolution of our company from providing virtual urgent care to a platform provider enabling hybrid care. We continue to make good progress migrating our clients to Converge. As we announced in February, we successfully migrated some of our largest payer clients, and we saw volume from them ramp this quarter. With their volume now migrated, the percentage of visits on Converge is materially higher than the 52% from last quarter and, from 1Q, was over 68%. Turning to our Q1 financials. Total revenue was $59.5 million for the quarter, down $4.5 million or 7% from a year ago. Approximately $4 million of the decline in revenue versus last year was subscription related driven primarily by legacy platform declines, with the balance driven by lower visit revenue offset by higher services and Carepoints revenue.
Subscription revenue declined 9% from Q4 and was $24.9 million in Q1. We believe the first quarter was our a low point for the year for subscription. We believe that subscription revenue will increase each quarter this year with contracted customer go-lives, the full benefit of which we will see in the fourth quarter from a run rate perspective. We continue to expect our subscription revenue for 2024 to be approximately flat to 2023. AMG visit revenue trended 4% lower than last year and was $31 million in Q1. AMG visits were 6% lower this quarter versus a year ago due in part to the onetime dynamics I just mentioned. Average revenue per visit was slightly higher this quarter than last year at $77 driven by a mix shift within AMG away from on-demand urgent care visits.
Our AMG business continues to be strategically important to client expansions and new client wins. Our services and Carepoints revenue was $3.6 million for the quarter, a decline of $7.7 million from last quarter driven primarily by the timing of professional services and marketing. These revenues are uneven from quarter-to-quarter due to customer buying patterns for marketing services programs and for Carepoints as well as the professional services milestones that precede deployments. We anticipate that our services and Carepoints revenue will represent approximately 10% of our total revenue for 2024, two-third of which will be recognized in the second half of the year, driven primarily by go-lives of contracted deployments. Turning to profitability.
Our fourth quarter gross profit margin was 31%, a decline of approximately 300 basis points from last quarter. We view this decline as temporary, and it was largely due to lower subscription software and services revenue combined with onetime costs related to the very large payer migrations we completed this quarter. For the year, we expect our gross margin to approximate the levels we saw in 2023 and expand meaningfully in future years as our mix of subscription software increases. We are tracking well on our path to normalizing R&D spending. GAAP R&D expense was flat to last quarter and was 7% higher after adjusting for $3 million of software development capitalization associated with our government work. Inclusive of this spend, software cap adjusted R&D spend is 10% lower than a year ago.
We continue to expect our total R&D spend to decline at least mid-teens percent this year versus 2023. Sales and marketing expense was $4 million higher than 4Q 2023 driven by severance and other costs associated with our growth transformation. We also had higher compensation accrual compared to last quarter, which was offset by lower salary expense due to our head count reduction. Overall, we expect GAAP sales and marketing costs to be level year-over-year, inclusive of onetime costs. G&A expense was $8 million higher versus last quarter driven primarily by higher compensation accruals plus higher stock-based compensation expense due to the partial vesting of 2024 grants. We expect our quarterly run rate for stock-based comp for the remainder of 2024 to be below the level we achieved in the fourth quarter of last year.
Adding it all together, adjusted EBITDA for the quarter was negative $45.7 million versus negative $44.6 million last year. Our gross profit contribution is lower by $7 million driven by lower subscription software and onetime migration expenses, offset by lower R&D. Transitioning to the balance sheet. We ended the fourth quarter with $309 million of cash and marketable securities. Turning to our outlook. Q1 represents a good start to our year. And tonight, we are reiterating our 2024 guidance. We continue to expect revenue for 2024 to be in the range of $259 million to $269 million for the year. We expect subscription revenue to be roughly similar to that of 2023 and to grow incrementally each quarter this year with contracted go-lives, the full impact of which will be evident in the fourth quarter.
As to adjusted EBITDA, we continue to expect our 2024 adjusted EBITDA to be in the range of negative $160 million to negative $155 million. Additional context around our assumptions remains unchanged. We are on track to reduce our Converge-related R&D spend annually by 25% to 30%. However, government-related customization of our platform will moderate the overall decline in R&D to a circa mid-teens percent reduction for the year. Our head count actions will result in over $15 million in compensation-related savings, so our guidance assumes we return to normal levels of incentive compensation versus 2023. The progress we have made in recent quarters significantly adds to our financial visibility and meaningfully derisks our path to adjusted EBITDA breakeven.
The impact of our plan supporting the DHA, including the enterprise expansion, is not fully visible with a single year of guidance for 2024. And so in February, we took the extra step of providing a range of longer-term financial expectations, the highlights of which are as follows. We expect revenue in 2025 to be in the range of $335 million 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 deployments. We further expect an approximate 70% improvement in our adjusted EBITDA to a range of negative $45 million 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 configuring our platform for operation in the government ecosystem, it will be fully scalable and ready to deliver complete hybrid care across the entire MHS enterprise with minimal future development required. And finally, rounding out our forward-looking expectations, we currently expect to achieve adjusted EBITDA breakeven in 2026 with a cash investment balance of approximately $150 million. In conclusion, we are encouraged by the strides we have made in our business, and in Q1, we made good progress toward our goals. We believe we are just beginning to capitalize on the opportunity in front of us, and this guidance marks the early days for the long-term profitable growth trajectory we envisioned. Thank you for listening. With that, I'll turn the call back to Ido for some closing remarks.
Ido?
Ido Schoenberg: Thank you, Bob. In closing, I would like to thank our teams for the work we completed in Q1. We are on track for our goals and we made progress towards our strategic initiatives. And if we deploy and migrate our customers and the market takes note of the benefits of the hybrid care we enable, we are solidifying our role as a digital transformation partner. We believe we are just getting started. With that, we are ready to conclude our formal remarks. Thank you for listening today. Operator, we are ready to open the line for questions. Thank you.
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