Good morning. My name is Jessica Tassan. I am the healthcare services analyst here at Piper. I'm thrilled to be here this morning with Amwell, one of the country's leading digital healthcare companies. We've got President and CEO, Roy Schoenberg, and CFO, Bob Shepardson. Thank you both for joining us, and welcome to the Piper Conference.
Thank you.
Thank you for having us.
So I was hoping to maybe kick off with just a kind of review of the evolution of the Amwell story. A lot's changed since the IPO, so just maybe from your perspective, how has Amwell evolved over the last three years?
So we have three hours for this talk, right? Well, you know, to keep it brief, I think what happened since the 2020s is we, we've morphed, we've adapted. I think what became very apparent to, to all of us, right around the 2020, 2021 year of COVID, was that this telehealth thing, which is, by the way, what we do, is, is going to serve in a completely different role in the market. We went into that period with telehealth being a novelty that allows for convenience. You know, people were using it to chitchat with a doctor and usually get a Z-Pak or whatever it is, which, by the way, is life-saving if you have kids and everything. But walking out of the pandemic, it became very apparent that telehealth is actually a distribution system.
It's not a video conferencing application. It's a logistical infrastructure on which healthcare is gonna be distributed. That sounds a pithy statement, but the reality is that that is a fundamentally different role in an industry that is suffering, I think everybody here knows, from a lot of different illnesses. That translated into a completely different ask in terms of what the technology needs to do, who are the participants in its use, what is the ROI that the different organizations that are using it are going to generate out of it, and also, obviously, that the infrastructure itself needs to be built completely differently in order to supply the, you know, that kind of new world.
Maybe the analogy was, that's really just an analogy, that walking into 2020, telehealth was a little bit like, you know, the early days of Amazon, where you thought that Amazon was a bookseller. And walking out of, you know, COVID, it is a distribution, a logistical infrastructure, just like we know today in hindsight, that Amazon is an infrastructure, a logistical for exchange of merchandise, you know, moving inventory around the world. This is a profound change, and we had to adapt both by technology, which I'm sure we're gonna, we're gonna touch on Converge and all of that fun stuff, but also in many, many other dimensions of the way Amwell operates. And of course, if you like, we, we have... You know, we can go into that.
Yeah. No, that's. I think that's extremely helpful, just the transition into a kind of infrastructure technology. So one of the ways that Amwell responded to this shift, obviously, was with the development and launch of Converge.
Right.
What are kind of the functionalities in Converge that Amwell did not possess in the prior iteration of the platform?
Well, probably the most fundamental thing is that it's designed as a brokerage system. It is designed fundamentally as a logistical pipeline that allows healthcare services to be digitized and projected into various places where they can deliver value. This is very different than the legacy platforms that we had before that were essentially multiple different products that did their job. By the way, some of them are still doing their job really well, even though they were, you know, developed 15 years ago. But because the business narrative of our customers has changed from just checking the box on delivering urgent care service, if you're a health plan, or, you know, just a consultation in a hospital, if you're a health system, they're looking for this technology to allow them to reinvent the way they do business with a lot of efficiencies.
You know, good examples would be payers. Health plans are thinking about: can we use this technology to reinvent primary care? And the whole discussion around virtual primary care is a big, big part of the narrative we, we hear from them. That means that you need to mobilize clinicians, which usually has not been where payers operate. You know, they're, they're more used to be a financial service organization. They need to mobilize clinician supply in a different way, and that technology, you know, serves its purpose. Health systems who are suffering from workforce attrition and so on, are thinking, "Well, we need to load balance our clinician services between different facilities and different buildings in order to allow them to see a lot more patients without having to be physically next to them." These are conversations that were never had before 2020.
Converge is designed to allow for all of these business narratives to be operational for them, and most of the new business that is coming into Amwell fully utilizes those capabilities, and these are the ones that are really, really hard to do. Let me just put it this way. The video conferencing piece is the easy, easy commoditized part of things. This is all about logistics at this point.
That's very helpful. Can you maybe describe some of the automated programs, triage, behavioral health, that are also integrated into the Converge platform? Just to what extent do those kind of link into a live or synchronous video chat?
That's a great question. I mean, you know, some people are wondering, why is it called Converge? So there's a lot of different dimensions to it, but the point that you just made, the point about Converge is that all of these different modalities, the physical, the digital, virtual, telehealth, whatever you wanna call it, and the automated are all delivering value if they actually come together to surround the patient. Because at the end of the day, both the experience, but also the money for everybody involved, is associated with how efficiently can we manage the needs of any individual patient. There's a role for that patient to be seen inside a healthcare building, you know, to get blood or do an MRI or whatever it is.
There's a tremendous role of following up those patients virtually, but there's an enormous span of time, an enormous span of time, that that patient lives with their healthcare challenge, and we're not around. No one from healthcare is around that patient, and usually, that's 99% of the time that we live with our healthcare issues. The ability to invoke a sentinel technology that's going to essentially take that patient hand and be with them, always on, during that time, to not only reassure them and support them and inform them about what they need to do and the medication they need to get and everything, but also, very importantly, to understand if they are doing well along their path to recovery.
But also, if they're not doing well, the ability to escalate automatically, to escalate that patient back into getting in front of a live clinician, obviously through telehealth, because that's the only way that you can reach that patient within a matter of minutes or, you know, when they have the attention span. So that is why these integrations are so important, and all of these products, all of these automated capabilities, like Conversa, Silver Cloud, all those acquisitions we've done, are designed and built into Converge to perform that exact function.
That's very helpful. So for what condition categories do these automatic or maintenance capabilities exist today?
So maybe the best way to kind of divide it, I would say, there's a cluster of capabilities on the medical side, and there's a cluster on the behavioral side. They're very, very different. Historically, this was the distinction between the acquisition of Conversa, that was focused on medical, and Silver Cloud, that was in behavioral. On the medical side, I think maybe the easiest way to kind of divide the world is there's a lot of interaction with patient that happens prior to the arrival to a medical treatment, and that's all of the pre-op, pre-colonoscopy, pre-admission, and so on. There's a lot of automation that can happen while the patient is undergoing a certain kind of treatment, usually chemotherapy, those kinds of things.
Then there is a whole bundle of those programs that are sustaining a patient that has a chronic condition over time. That's where the diabetes, heart failure, you know, those come in. And all of these can be operated singularly with the patient or tied into what we just talked about, the escalation into their clinical team and so on. On the behavioral side, again, if we have all day, the behavioral side is fascinating because we are broken, you know, in this country in terms of the availability of those services and a lot of stigma around it and everything else.
That's a place where we have a different balance between purely automated, monitored, automated, coach-operated behavioral health program, where you-- the patient is automatically interacting, but someone is actually reviewing and interacting with them as well, and escalation into our AMG structure, which has therapists, psychiatrists, psychologists, and all that kind of stuff.
I think, the behavioral-
I'm not doing it justice. I mean, there's a whole world there.
Yeah.
Yeah.
No, I agree. I think the behavioral piece is one of the most underappreciated parts of the Amwell story. So could you just offer an update on the transition to Converge? I think all of your health system customers, or most of your health system customers, should be on the platform by year-end, and payers, by the end of CY 2024. Is that still kind of a valid timeline? And why the decision to prioritize health system customers first?
Well, to start from the end, the decision to prioritize health systems was because they were in the toughest spot, you know, and still are, you know, both financially, but also in terms of workforce and, you know, load of patients. And, you know, it literally came out of COVID, which everybody was on their knees, but really didn't get much better since, for a variety of different reasons. We owe them, you know, they're. As patients, by the way, as people, we owe them. We want them to do well. So we prioritize them because they had an actual, you know, need that was higher than anybody else.
The payer side of the market has a little bit more breathing room because they're essentially offering benefits, and their asks are really about their own business transformation, which usually is a long-term, you know, plan, especially when you talk about large health plans. So the sequence of focusing first on the transition of our health systems and then the payers actually panned out to be the right one. We see them perfectly happy with the pace of transition. I think that what you stated in terms of the transition plan is about right. There are most of the health or many health systems have done the transition.
But the one thing that I think, and I would be honest in saying that I think we underestimated, is that the appetite for change by health systems for use of digital, is actually much larger than what anybody predicted in 2020. What I mean by that is, originally, the thinking was, you know, you have a customer who's using the legacy platform. When the new platform is gonna be available, you know, as long as apples and apples of functionality are available, they will transition. Some, and that was true for some of them, but I think many health systems are now saying, "Well, we're not going to transition to the same functionality in the new product."... We're going to completely reimagine the way we do business, and that's where room monitoring comes in. That's where, you know, we talked about load balancing capabilities.
There are so many health systems out there that are saying, "We actually wanna have a patient portal. We actually wanna run a little health plan. We actually want to direct services to regional employers." You know, we have to reinvent the way that we do business, which means that they are not shifting their video conferencing from legacy to the video conferencing on the new. They're actually having a much more strategic deployment of technology, and that takes a little bit more time 'cause many of these changes are new to them. They're business transformation on their end as well. This is usually something that describes the more advanced health systems, not the regional hospital here and there, that, for the most part, just moves to Converge. But that's a good thing.
You know, we love the fact that our customers are saying, "Let's not just switch into Converge. Let's integrate all of these different systems. Let's open up a consumer portal. Let's create a digital second opinion line. Let's work with a payer to create a unique product that we can offer to their membership." These are staggering transformations that we're seeing and are possible with Converge.
Okay, understood. So is the way we should think about it just that some health systems could kind of bleed into 2024, in terms of the transition to... Got it.
With a different profile of use of digital.
Okay.
Yeah.
But by the end of 2024, we're targeting for everybody.
Got it. That's very helpful. So maybe, Bob, for you, just some kind of attrition is natural, I think, in any replatforming. We were told to anticipate that by the company, and I think that's completely fair. Things appear to have stabilized in the third quarter. Can we think about 3Q as the floor in subscription revenue? And, and do you kind of have visibility into sequential growth from here?
Well, Jess, I would say we have tremendous visibility and a substantial increase in subscription revenue, and that's more of a medium-term slash 2025, and we'll get into that-
Okay.
... when we talk about, I think, the Defense Health Agency. In 2023 and 2024, we continue to deal with those dynamics that you highlighted that come along with replatforming, and decisions that were made by some of our customers, prior to Converge really being available. And so, I would say, yes, we have terrific visibility, and we're very bullish about that. You know, whether we're at the trough here, I think it's difficult to sign up to.
Okay, that's fair. That is a great segue. So, so Amwell announced a very large or what we believe is a transformational contract with the Defense Health Agency. Can you walk us through that win, and what does this mean to the... not just, you know, financials, but also for the Amwell brand?
Sure. Do you wanna hit the brand?
Sure. Maybe I'll just talk about what it means from a product standpoint.
Yeah.
I think DHA, and we don't, we don't speak for DHA, but DHA is looking for the, for that logistical capability we talked about. Because of the way that the governmental healthcare system works, they have a lot of different facilities, they have a lot of different audiences, they're spread all over the country and, you know, in other, in other territories. And to them, utilizing their resources more efficiently is the name of the game. And Converge, which we talked about, that has that brokering ability, fit directly into that place where they said, "We wanna be able to take a clinician that is in point A-" And by the way, I think a, a small point that I think is really, really important, in the governmental healthcare system, state licensure limitations actually don't really apply.
If you're a clinician at the VA, you can treat any veterans around the country. So for them, the flow of healthcare services is a very, very achievable model, more so than to the commercial market. So when they stated, "We wanna have a new distribution system for healthcare," Converge really, you know, was shining because of its architecture. I believe that the... Not I believe, there is, as you may know, entering the operational structure of the government is complex, sometimes maybe too complex for anybody's good, but it is what it is. And that decision of DHA to essentially fund and help in getting all of that commercial system of Converge into the government operation is really an incredible vote of confidence.
But I think that this is, I don't know if the term is the gift that keeps on giving or whatever it is, but once you are able to become the switchboard under this behemoth, you're delivering value.
So the behemoth that we're talking about here is 9.6 million service members, family and retirees. It's 525 clinics and about 45 hospitals and medical centers. The task order was awarded to Leidos, who's the prime. We're a subcontractor to Leidos. It's $180 million over a 22-month period of performance. That period is dictated by the duration remaining in a funding vehicle. So the 22 sounds weird, but it's really not. It's just aligned, and we fully expect that that gets, you know, re-upped at the expiration of the 10-year period. So $180 million was the total task order to the Leidos Partnership for Defense Health. We are a member of that partnership, and a substantial part of the one eighty.
We're not at liberty to disclose exactly how much it is, but our share of that and assuming that we go to the full enterprise, we'll talk about the stage deployment, would put the US government or the Department of Defense, the Defense Health Agency, very much towards the top of our customer list in terms of size, and this is all technology revenue. So it's not it, it's a true SaaS contract across three different big product areas for us. It's not just Converge, it's our full automated care library, the legacy Conversa, which Roy mentioned, and it's also digital behavioral health, which is a huge priority for the DHA, and that's the legacy SilverCloud.
So we're bringing all of our capabilities really to bear for the DHA here, which is why this is such a significant contract, in addition to the absolute size of what we're covering here. But I think-
Does that sound like the word convergence?
That-
'Cause that's-
Yeah
exactly what it is.
I think we get the name.
Yep.
So I wanted to just ask, when does that 22-month period expire, and when would the renewal have to occur?
July of 2025. The end, I guess, August of 2025.
Got it. And then I know you can't quantify exactly how large the opportunity for Amwell is under this funding vehicle, but maybe, you know, my biggest question is just, is this a true subscription PMPM contract, or is revenue contingent upon engagement? And if the latter, is Amwell entirely responsible for engagement, or is Leidos sharing in some of that burden?
No variability related to engagement.
Okay, great.
Across any of the three areas.
So it is a true PMPM?
Yes.
Okay, got it.
It's not structured as a PMPM, but it is a true fixed recurring revenue contract.
Okay. That's extremely helpful. So what sort of investments does Amwell have to make before the initial phase commences across the five selected sites?
Well, we're working now. We've been engaged with Leidos and the DHA, from, you know, for the last—since the award, actually a bit prior to as well. But, Roy, maybe you want to cover the types of customization we're talking about.
Yeah. The fun of bringing a commercial system into government structure is real. There are significant investments that are made in terms of creating security instruments that the government is asking for. As you can imagine, the system is going to be managing the health state of individuals that are of, you know, in a pivotal position around the country. So it is actually positioned to live inside one of the most secure areas in the cyber operation of the government. That comes with some lift and certifications. But there are other implications. It's not only security. I mean, things like limitations on the background of people who can maintain and support the system.
There are, you know, very different kind of profiles that the government insists on in making sure that the personnel involved in maintaining the system is going to be at a certain level. There are, like any other customer, but more so with the government, there are different reporting requirements, there are different analytics requirements that are coming in. But the good thing about it is that, you know, quite a lot of it, we actually had already built into the design of Converge, because many of our, we serve very large healthcare operators around the country who have government business. So in many cases, we needed to get them to a place where they could bid on government business already, so we implemented WCAG compliance and a variety of other things.
But there's still work to be had just because of how specifically deep the operation or the system is going to be in the military. But there's, you know... The good thing about it is that they did the work of verifying that we know what we're doing, that we have a way to bring the system into that position by the time, you know, that they asked for it to be there. And that was all done long before they actually put ink on paper.
Yeah, that's very helpful. And then, maybe, Bob, just in terms of kind of then, as we look at our models, R&D burden versus revenue ramp, can you just define that or give us some parameters? And then speak to the kind of cash flow expectations for this contract over the initial 22 months, as a kind of standalone time period.
Sure. So, from a revenue perspective, there'll be... I talked about the three different services.
Mm-hmm.
There'll actually be three different go-lives over the course of 2024. We're working on exactly what those will be together with our partner. But that's when we'll start recognizing... So revenue, and there'll be an initial deployment of five sites, so about 10% of the total enterprise will be in the first deployment, the initial deployment. And so that revenue will ramp up the 10% over the course of the year. All of the work that we have to do for the full enterprise is really being done for the first go-live. So we're gonna have all of the cost burden associated with the entire enterprise, really with this initial deployment, which will happen, you know, over the course of this year.
Then you flip a switch for the entire enterprise, and that comes with very little cost associated with it. For the initial five sites, we are basically, as I said, running all of our costs through that. We would recover and some all of our costs of that of the customization and integration work that we're doing over the 22 months, but for 2024, it'll be a cash flow. It'll be an EBITDA drain, I should say. You know, but over the entire 22-month period of performance, if you want to measure it like that, it would be cash flow accretive.
We expect that, you know, we will have these three go lives over the course of the year, and we're planning for an enterprise-wide, deployment, at the end of the year. So all of that revenue is really 25 revenue, which is why we've been talking about, you know, a real step function from 2024 to 2025 in terms of not just revenue, but cash flow.
Okay, that's extremely helpful. When do you think you'll- or when should Amwell have visibility into a, you know, renewal post that 22-month remaining task?
I would imagine it's in 2025, you know, we would obviously need to do it by then.
Okay.
But, you know, think about what's going on here. There's significant investments in integration, and you'll be running, you know, the entire enterprise-wide digital behavioral health, automated care on Converge, you know, and they will have likely just gone live in the fourth quarter on the entire enterprise. You're talking about 2025 renewal. I don't really think that should be a concern if they've just made a decision that this is the platform we want to run on for the next 10 years.
That, I would tend to agree with you there, or that it seems expansion is more than likely. But I also just want to maybe end on... I think the DHA contract definitely testifies to the security, right, and the viability of the Converge platform. Could this augur well, potentially for an expansion into the VA? Is this a possibility, and is this, you know, the future of Amwell?
I think that the reason why they're doing it is that they're trying to capture the network effect. You know, they have a world of resources that are span across, you know, DHA, VA, and others, that are all delivering healthcare, and they're trying to build up the switchboard by which those healthcare services can be shared and essentially mobilized over technology. There is no question that when you build a network, when you essentially allow a couple of nodes to go live, you are proving the point that you can now add the rest of your ecosystem on it and rewrite, completely rewrite, the cost efficiency of its operation. That's the narrative behind all of this. That's why, you know, when Bob is talking about the gradual growth, but the very, very bullish view of it, this is not our thinking. This is their thinking.
The VA infrastructure is a very eligible. It's running, for the most part, on similar technologies. It's just the natural expansion of tying the dots that we're seeing happening in front of our eyes.
Okay, I think that's a great note to end. Congratulations on the win-
Thank you.
And thank you again both for being here with us.
Thanks, Jess.
It's a pleasure. Thank you.