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. [Operator Instructions] I would now like to hand the call over to Sue Dooley, Head of Investor Relations with Amwell. You may begin.

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.

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 3 months, we have taken major steps to adapt and transform our organization that will result in a greatly reduced cost structure as reflected in our forward guidance. In addition, we have good visibility into strong top line growth in 2025, coupled with greatly improved margins. The guidance we gave on our last call 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…

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…

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.

[Operator Instructions] Your first question comes from Charles Rhyee with TD Cowen.

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

Charles, thank you for your question. The duration of our agreement did not change much. It's roughly around 3 years, give or take. The renewals are, first and foremost, a vote of confidence in Converge. Usually, old clients that renew are looking at the new platform. And each new client does look to add new elements to it. And of course, those elements and those solutions, in addition to traditional neutral visit of on-demand or scheduled, vary from one client to another. I'll give you a few examples. Payers typically, and Elevance is a good example of that, add virtual primary care. We believe we can see it enormously valuable and has a lot of potential for growth, adding a lot of value to members and creating a lot of savings and impact, clinical and financial, to the sponsors. In addition to that, we see same-store growth, certainly relevant for renewal, in all the area of automated interactions. Automated interactions are very broad in their impact. They could be as simple as facilitating bureaucratic activities like showing up for appointments for colonoscopy, all the way to managing complex illnesses like diabetes and others. And that's certainly something that we've seen. And I gave at least one example, the Blue plan. That's a new client actually -- I'm sorry, that's an expansion, so that's very relevant to your question. Another example that we see now in renewals and expansion is shortage of staff in hospitals. And the ability to add to the roster of nurses that extend their career, and could be very helpful in saving hours and hours of time in facilitating things like admissions and discharges, is very significant to many of our customers. Lastly, last example, and there are others, but we're short of time, is the whole notion of collaborative care as it relates to behavioral health. Our ability to use SilverCloud technologies to help primary care providers drastically improve access to behavioral health services is something that many of our customers are very interested in. So in short, I believe that all of our renewals are really focusing on the broad capabilities of the Amwell platform today, which is very different from our legacy offering.

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

Sure. So as you know, United is a very old partner of Amwell. We have a very strong relationship that dates for a really long time. Those relationships are strong and the internal events within the United Group, I do not expect to have a material impact on our relationship or at least impact on our guidance as to the specific case that you've mentioned. But certainly, and you're absolutely right, we've seen quite a few examples where tech-oriented companies offer their care and it was very challenging for them, and quite a few exited this business. In many ways, we believe the testimonial of how difficult an offering and doing what we do is, in the sense that it's really important to work with existing providers that are trusted. Managing this network for digital services is far from obvious, and the technology that is required in order to do that is nothing but a commodity like some people suggested. United and many others reaffirm their deep commitment to hybrid care and digital care. So it's important to understand that those people that exit, including Walmart and others, do not say that easier access to health services is not something important, they just realized that some of their initial models really were struggling a little bit to find their way. We see that as affirming our view where we offer technology to connect existing trusted providers with consumers but opening the gate to a tidal wave of technology innovation that we believe could be very, very impactful. And if you want one example, it's the use of automation and AI. We believe that those technologies could have a far-reaching effect on improving the outcomes in health care. It's almost impossible to use them as a stand-alone. And in the context of interacting the trusted providers and patients, they could find a very good way to realize this potential.

Your next question comes from Craig Hettenbach with Morgan Stanley.

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

Absolutely. And Bob can follow with some financial observations. But essentially, our relationship with the DHA and with the Leidos partnership on health is really terrific. They're very experienced. It is a very large project, and it's going very well. We're going to really do everything we can to make sure that it continues to grow very well. As I shared in the prepared remarks, the first milestone for the year is behind us. We went live with behavioral health which, according to the client preference, was the most urgent thing for them to deploy. As I mentioned earlier, there are 2 more milestones: the deployment of Converge, which we are focused on right now; and lastly, the deployment of automated care towards the end of the year with expected enterprise rollout at the end of the year. We believe this time line is still very realistic and very viable going forward. Any other comments, Bob?

Yes, Craig, thanks for the question. I guess I'd say, from a revenue perspective, you can expect to see the lion's share of the impact in the fourth quarter, with a lot of that revenue coming on with go-lives in the fourth quarter. And for the first couple of quarters, Q2 and Q3, you're going to see a lot of services revenue come online. There's two components to the services revenue that we'll be recognizing as we go forward here on the customization of the platform. One is recognizing the revenue is tied to go-lives, so there's that aspect that we won't see in the next 2 quarters. But then there's another leg of that, that we will see, and it will drive significant growth in our services and Carepoints revenue in Q2 and Q3. So from a financial perspective, you'll see a few things going on. Revenues, highly fourth quarter focused there. Services revenue, you'll see come on in Q2 and Q3 in a meaningful way. Those will be our largest quarters from a revenue perspective in services and Carepoints. And then you'll also see capitalization of software spend, R&D spend, much higher in the second and third quarters as well. So I think financially, that's what you can expect as it relates to the DHA book.

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

I feel like we've got it pretty programmatic at this point, Craig. As I think about the components, I think gross profit is going to rise very meaningfully over the next few quarters, so getting us back to about what we did last year on the cost of goods sold side and the resulting gross margin, and then increasing to north of 50% the next year. So I don't see much concern around that. . And then as I think about the operating expense line items, we have a very good lead on the Converge-related spend and the declines there. Continue to expect that's going to be in the area of 30% year-over-year and have a very good idea and a lot of comfort, I think, built into what we're spending for customization in the government sector. So I feel like we've been conservative in how we've estimated that, and the mid-teens decline reflects that level of conservatism and the contingencies built in for that work. And in SG&A, I think we've taken some actions in January. I expect that we'll find incremental efficiencies going forward on the SG&A side. I think historically, we've been talking about a lot of operating leverage there. I think we've got scope to actually take those costs down year-over-year. So I think those are really the points I'd make. I don't know, Ido, if you had anything you wanted to add.

Yes. Maybe giving you some color from another angle. As Bob mentioned, the big event, of course, is the completion of Converge. The platform is built and proven, and that allows us to really greatly reduce the R&D investment. In addition to that, we spent the last few months really focusing on efficiency and effectiveness in the company, across the entire company, with special focus around the efficiency and effectiveness of our growth organization. So together with third-party consultants and our own team, we took a fresh look on the market. A lot has changed in the market and that drove some very interesting opportunity as it relates to our strategy and the focus. We redefined our TAM and SAM and chose to basically redefine also our business line with special emphasis around the profitability. We took a new market segment, and we decided to focus on segments where we have the highest right to win and there's opportunity to generate better gross margin, especially if driven by favorable mix towards the software subscription. We did change our entire growth organization. We built a whole new structure around sales operation to support the strategy that is fit for the current market condition, the competitors and Converge. Our marketing is really resonating right now with the market. It was revisited. We upskilled our talent. We brought some people from the outside in an area that's needed to and trimmed on people that are less relevant to what we're doing. We trained the entire staff on the new plan, and we created new comp plans that really are encouraging our team to focus on higher-margin software subscriptions. And clearly, one of the outputs is that we have less quota carriers and the bag they are carrying is much broader. That's not only interesting financially with real effectiveness, that means that these people are able to tell a story of a much more broad end-to-end solution that we believe the clients appreciate. We no longer have separation around business lines. Other consultants are able to talk about our entire portfolio. We no longer have hunters and farmers. We really have 1 team that is nurturing the relationship with both new customers and existing payer customers. So these are some examples on what happened in the past few months in Amwell. And the net of it is that we believe that we have already achieved much more focus and efficiency in our organization, and we fully expect to continue those efforts over the next couple of quarters, which will be demonstrated also in our cost structure.

Your next question comes from Jessica Tassan with Piper Sandler.

So I wanted to confirm, first off, the sequential growth you're guiding to from a subscription perspective, that contemplates kind of known and understood attrition and is net of that attrition?

Yes, that's correct.

Okay. Awesome. And so then my follow-up is just I think you guys mentioned that the DHA has expanded, in some respects, into behavioral capabilities that were not part of the initial deployment. Can you just help us understand what's the scope of the initial deployment from a product perspective? And then what is this incremental behavioral business? And my last one is just can you confirm that the DHA enterprise-wide deployment is like locked and loaded, funded and poised to occur in the fourth quarter of the year?

So behavioral health was always part of what the DHA wanted to deploy. In fact, the taking care of people initiatives is really focusing on behavioral health for our men and women in uniform. So that's why it was always the plan. And indeed, the plan was executed to start with the automated behavioral health, which we deployed. The product basically allows providers to prescribe different treatment plans that are highly automated but with a hybrid approach, together with coaches, around things like depression, anxiety, and a list of other ailments that are behavioral health specific. So we've done that. And if you remember, in the initial year, it's about deploying the services in 5 demonstrative sites across the DHA and, once this is done and working well, to go to an enterprise expansion. So this first milestone is deploying those services in the site of the DHA, and we went live with it and it's operating. The other two milestones are the Converge deployments that we're focused on right now. And the last one is the automated care opportunities that I mentioned earlier. All that is done complying with a long list of requirements for cybersecurity, for staff credentials, for the GovCloud operation, and many other things. So we are really investing here in capabilities that would be very relevant across the government market and now also a very nice showcase that some of our commercial customers are looking at. As far as the contract and the budget, as a reminder, the $180 million budget for this is part of the $4 billion task order of vehicle for the DHA. And all that was granted. This budget is both for the initial deployment that I mentioned but also for the enterprise expansion that is planned to take place on the fourth quarter. While the clients, of course, have always the right to delay or stop anything that we are doing, we believe that so far, everything that we are doing is going very well and generating much value. And there is no budgetary or contractual barrier for the enterprise expansion as part of the existing funded vehicle.

Your next question comes from Jailendra Singh with Truist Securities.

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

Sure. I'll give you the details on what took place, and then Bob can add his view on the impact, to the extent we can share. So essentially, I think what's happened in Change is evident to everybody. As it relates to us, when we went live with the likes of Elevance and Highmark, the experience was the consumers logged in and they were not able to continue with the visit because they were not able to see their co-pay really going forward. So we had lots of doctors waiting to see patients that could go in and lots of patients that couldn't see their doctors. Obviously, that's a serious barrier. Our initial solution was to find an alternative to Change. It took some time but we pulled it through. And of course, after a while, Change brought a solution, and we were able to resume the service. Many, many participants in the ecosystem were affected by this. We certainly were not the only one. So I don't think that this has an impact. I don't remember any example of an impact on our pipeline or a discussion with potential customers or with existing clients. Maybe it's a little bit in the reverse, the fact that we're able to recover from such a major challenge is somewhat of a plus in our reliability in the market. Generally, the migration itself was the largest migration we had in our history. It was very interesting because it took place at the beginning of the year, at a time where access to providers is the hardest and demand is the highest. In addition to that, we also launched a new product with Elevance, the virtual primary care, that we had to stop. So that was really an interesting stress test to all our operations, both technical and building two-way integration with a lot of client systems that were ramping up over time. And in addition to that, we had to manage a network that was in full capacity and in very high demand. Pleased to report that we were able to execute, and the system did go live and scaled and is now in full production for both a Highmark and Elevance. Bob, maybe you have some more comments.

Jailendra, we estimate that has Change not happened, we would have been flat from a visit perspective year-over-year. So that cost us the volume decline that we saw in the first quarter here. And so I think that was the question you asked. But absent that, we would have been at least flat. And then what Ido described about the migrations, that was also a onetime event that cost us some volume, but that would have been the growth on top of being flat vis-a-vis the Change issue.

Your next question comes from Ryan MacDonald with Needham & Company.

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

So Matt, these are really great questions. And of course, I cannot opine or share anything about specific clients of ours, but more generally. So zooming out for a second, do we believe that people who will use digital care is an opportunity to act as a health care system. And I think that everybody agrees that the answer is a very strong yes. We don't think that, that trend is going anywhere with so much potential: convenience, cost savings, improvement of outcome, access to higher quality care, that is possible when you use a hybrid care. I think that some of the events that you mentioned demonstrate that this is really complicated. And the solution is not very, very easy not only for a single organization but it really requires integration. The answer is not by having one here or do it all but rather have a solution that is working across the ecosystem to build bridges and really combining in a hybrid way the solutions that exist. There is no substitute to the trusted brands of providers. There is no substitute for very sophisticated network management that take into account process of considerations. There is no substitute to reinvest in what it would actually take to allow patients and consumers to navigate to this very important complex set of options. So having said all that, we believe that we built an infrastructure that facilitates that connection and does not overlap with the traditional roles or traditional players that we believe continue to be there. Saying it another way, we believe that what we build is positioned very well to benefit from everything we said. Just to give you an example, UnitedHealth Group was very vocal saying, after what they announced, that they are very committed to telehealth, to hybrid care. They definitely plan to continue and sponsor it and they said it to us, they said it to the world. So in many ways, my short answer, after the long detail, is that we are here, we're still serving a big part of the U.S. ecosystem. When there are going to be less players, the math is that we are likely to net benefit it. But it's early days, and we're not trying to suggest right now how quickly this trend is going to evolve from our vantage point.

Your next question comes from Stan Berenshteyn with Wells Fargo Securities.

Ido, first, maybe just a follow-up on your comments regarding the go-to-market strategy. You mentioned there are some changes there. Can you maybe just expand specifically what are the changes? What are the focal points that are different versus historically? And maybe if you can also comment on how is your sales team now splitting their time between upselling existing clients versus going to market for new clients?

Sure. So as I mentioned earlier, the market today is so different from a few years ago. Essentially, buyers want complete solutions. When you think about those solutions, it's helpful to, I think, talk about it in a way of what do patients want, what do consumers want. And we all want to go digital, go online, either proactively or reactively, and have the richest set of options from trusted sources with a combination of in-person, automated and digital. In addition to that, providers are key to that solution. So providers want to have a solution that is very intuitive, very easy, that is fully embedded in their workflow, protects the licensure, allows them to get paid for the time in a fair way. And all those things are not very easy. And we believe Converge solves for it in a really comprehensive fashion. We also believe that the combination of our own network together with a long list of partners that is getting longer by the day, like Cleveland Clinic and many others, allows us to offer the full gamut, not only urgent care but also diabetes and hypertension and nutrition and GLP-1, and stroke, and psychiatry, psychology and therapy, and so on and so forth, in a really efficient way. So you have trusted services from nonbrand across the full care continuum through an interface that you certainly need, that connects you to people that you trust. Having said all that, as it relates to the market demand, what I just said appeals to subsegments that we have defined, and we just don't have the time to go through, within the payer and provider community where this is the most compelling, where what we created has the best right to win. So together with our friends at McKinsey and others, we really net those out and package our products in the right way to address those needs. The teams that we built are no longer separated by product line or by new logos and existing customers. Basically, the idea is that each support of consultants is able to basically establish new relationships but then continue this relationship and manage it to expand it or focus on existing relationships and just expand it. And the metric here is more related to capacity rather than the type of people that do that. And that may sound like a small change, but it's actually a very profound change. Anyone that is facing our clients in Amwell today knows that, from the first interaction, that they are going to own this relationship for many years. And that changed the dynamics, both on our end, but very importantly, for our customers.

Your next question comes from Hanna Lee with Bank of America.

This is Hanna Lee on for Allen Lutz. So just over the past few months, have there been any changes with what you've been seeing in the spend environment just overall macro pressures on health systems? I would just love to hear your thoughts on recent customer trends? How much do you expect growth in 2025 and '26 coming from either new customers versus expansion with existing customers?

Well, I think that the biggest change we're seeing is maybe from 2 or 3 years ago to today. And we think that many of those changes are permanent. What we've seen, first and foremost, is dramatic rise in sophistication of health systems. If telehealth was somewhat exciting and, in some cases, naive, today, hybrid care is a very effective tool that is known to do important things for health systems, to retain staff, to improve efficiency, to save time, to engage patients in a very meaningful way, to manage risk in a meaningful way, to name a few. So the RSPs that we see and the dialogue with health systems, both existing customers and new ones, is a very different dialogue than the one that we held only a couple of years ago. The ROI is really front and center to those dialogues. And it's no longer enough to talk about a broad platform. It's very important to dig deeper into specific solutions. And I gave a few examples earlier on the call today. The benefit of having Converge today is it's already coming out of the door with a very broad set of solutions but it's very often to get nuance, not only from Amwell but also from new partners, and to also invest solutions that our clients bring to the table. And that's a really important attribute. So I would say that there is willingness to pay for clear ROI. The model that is preferred is a model of risk sharing, whenever possible. But there is a growing conviction that we see in making those payments. So in summary, we believe that if telehealth 2 or 3 years ago was part of the innovation, differentiation, vision part of the health system, it's really much closer today to the operational mundane part of the infrastructure that has very clear goals and very clear ROI to be proven by the partner.

Your next question comes from David Larsen with BTIG.

This is Jenny Shen on for Dave Larsen. I just want to ask, you've mentioned in the past that 90% plus of the revenue increase that you need from 2024 to '25 is associated with contracted go-lives or backlog. Can you give us some more color there, any update, just to have a better idea on concentration? How much of that is related to the DHA contract? And any additional comments you can give us in terms of visibility, how you're feeling with the longer-term outlook for profitability by '26? And any comments on your good bookings, which you made some positive comments on earlier.

Yes. Jenny, I think we gave really specific guidance back in February. Nothing's really changed there in terms of those statistics. The percentage of growth that's underpinned by contracted go-lives still in that same ZIP code. And if anything, we have higher conviction around all that. So I don't really have anything incremental to share on that. And as far as the path beyond that to profitability, again, I would say, higher conviction as we've really dug in on our cost structure. We're going to show, just independent of all of the goodness that we're going to see top line and gross profit, if you just look at where we were in 2023 from an operating expense perspective, we're going to be down high single digit this year. And then we'll be down, call it, circa 25% from that level in 2025. So costs are coming out of the business very quickly. And again, on the revenue side and the mix side and the gross profit margin side, we continue to feel really good about the guidance we gave in February.

Our last question comes from Jack Wallace with Guggenheim Securities.

Congrats on what looks to be an increasingly positive outlook here. Just a question on the provider business. For the providers that have migrated, have we seen any churn there? And I say that because my hunch is, if most of the providers have been migrated at this point, there shouldn't be much of a churn element in the subscription line going forward. Do I have that correct?

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

No. I think that's right.

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

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

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