AMWL - NYSE

Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amwell Q4 2023 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] Thank you. 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 fourth fiscal quarter and year end of 2023. This is Sue Dooley of Amwell Investor Relations. And joining me today are Amwell's Chairman and CEO, Dr. Ido Schoenberg, and Bob Shepardson, our CFO. Earlier today, we distributed a press release detailing our announcement. Our earnings release is posted on our website at investors.amwell.com and is also available through normal news sources. This conference call is being webcast live on the IR page of our website where 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'd like to turn the call over to Ido.

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

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

Thank you, Bob. We are driven every day at Amwell to advance along the path to achieving our goals and pursuing our mission. Our solution solves the most important problems facing healthcare organizations today and is now proven in the marketplace. We begin 2024 on strong footing with a high degree of financial visibility and laser-focused on our priorities. As always, I want to take a moment to thank our team for their extraordinary work and passion as we pursue our mission as one team. 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 Craig Hettenbach with Morgan Stanley. Please go ahead.

Yes, thank you. Understanding you're going through some transitions in '24, it does look like the health systems are starting to benefit from improving utilization. And just curious, Ido, what you're seeing from spending intentions kind of at health systems versus health plans currently.

Hi, Craig. Well, you're right. I mean, health systems are going through a financial hardship, as we all know, and what they buy is different from what they bought only recently. In general, health systems are interested to buy platforms and systems that help them improve staff retention and help them improve efficiency. So, I'll give you an example. Virtual nursing is a high-demand item for health systems, as well as the automated programs to do variety of tasks to improve their performance. So, they continue to be a very important part of our business. However, the biggest story in many ways is the transformation that we see in payers that are now laser-focused on becoming much more meaningful for their clients, for employers as members, putting in place digital-first options and especially virtual primary care options that allow to upgrade the member experience and stickiness and greatly improve effective [indiscernible] to available in cost-effective option. Especially, some area of focus for them is behavioral health, which seems to be in very big need. So, I would suggest that, in general, the need and awareness for a platform to enable all parts of digital hybrid care are very relevant today more than ever. There is growing understanding of the challenges and sophistication required for such a platform, and the fact that we have so many clients migrated to Converge with very clear proof point is definitely a very strong tailwind for us in both segments, both for providers and payers.

Great. And then just a quick follow-up. Bob, thanks for all the detail on '24 and bridging to '25 and '26. On the 10% headcount reduction, can you just touch on kind of maybe some of the things you were doing with that in terms of getting leaner within the organization and anything else you're able to share?

So, this was across the company. And some of it was programmed in as we get right-sized in terms of our spending related to R&D. And some of it was related to what we're doing in the growth organization, Craig, and really -- and maybe it's best if Ido really addresses in a little bit more detail what we're doing there and what we're trying to accomplish.

Thank you, Bob. Look, in essence, Craig, the headline or zooming out for a second, we are completing, if we didn't even complete the re-platforming period for Amwell. And our investors and our partners have been enormously patient with us as we went through this very important investment. And we are today reporting on what is very clearly already the growth phase that comes after re-platforming. The biggest opportunity is in the top-line in the growth and we talked quite a bit about it in Bob's guidance. You can see what's happening, which is all contracted in '25 and beyond, and really the only risk and focus area is execution. But in addition to that, we are completely transforming our entire cost structure across the company. So obviously, in R&D, we completed this giant investment, and R&D is really right-sizing very dramatically. But in addition to that, people need to understand that our [delivery] (ph) organization is now doing less and less migrations only because we sort of did most of them, and we have some to grow, but not a lot. But much more importantly, everything we do with Converge is dramatically more efficient. The deployment cycle are shorter, the support is easier, it's a very, very modern, very reliable platform. The support tickets are a fraction of what they were in legacy. And in sales and marketing, the changes that we've seen in the marketing competition really allow us to completely transform the growth organization. The first thing we've done is to reassess our segments and we're going after very well-defined segments where we have the right to win. And of course, that includes the very large, very sophisticated clients where we have enormous advantage over others. Then, we are implementing a very specific go-to-market plan with great operational rigor and are beginning to execute on that. We changed our team. We upskilled a lot of our team. The headcount is smaller right now. And we changed the model from a fragmented account management and sales representatives into a single hybrid partner, individuals that are very well trained, very skilled to sell the full portfolio of our offering in the model of hunter-farmer. So, we have less quota carriers, but their impact is already very clearly much bigger. We also changed our compensation to encourage the high-margin reoccurring subscription software, and that change is beginning to pay off. So, we are now in a product that we believe is significantly more attractive in the market. It's proven in the market by very large, sophisticated customers. The cost of maintaining it and selling it is smaller. And that all explains the results that Bob shared, which really don't require us to do anything unnatural. It's mostly contracted. We just need to continue and execute. And we have a lot of execution under our belt. So, we think that execution risk is very small from where we sit today.

Got it. Thanks for all that.

Your next question comes from Jack Wallace with Guggenheim Securities. Please go ahead.

Hey, thanks for taking my questions, and I appreciate the multi-year guidance outlook. Echoing comments from the prior analyst, it does sound like a new transition year and then a pretty exciting '25. Focusing on '25, just wanted to get a better understanding for how the MHS deal impacts the model. And maybe more specifically with the terms of that contract, if I understand correctly, the task order ends sometime in the middle of '25. And just thinking about contribution from MHS in the back half of that year, what is in the guidance for '25? And how should we be thinking about that customer once the task order ends?

Maybe I'll take the headline and then Bob will give you more of the details. This year is really not a transition year of any sort. We are basically investing in a new market segment, which is the government market segment, take this out and you can see the transition in our number already today. But we are doing some really big investment with the Military Health Service that will allow us to get very strong returns, which are already contracted with this client and hopefully with other similar clients in the same sector for our work with Leidos and others. We talked in the last call about the task order, the $180 million task order. It is already budgeted and contracted, and it includes a few phases. The initial phase, which we are now going through, and already part of it is live, as I mentioned earlier, is the deployment in five sites of the entire portfolio that will step up for the full enterprise deployment. This is about one go-live per quarter across the Behavioral Health, the Automated Chronic Care programs, and of course the Converge deployment. From that, we're going to step up, in '25, to the full enterprise. This vehicle that we are using, the financial vehicle is covering us, but it does cover the entire Military Health Service GENESIS contract of the government that includes the EHR and other elements. So, this is really the core infrastructure for the Military Health Systems. We are quite confident that this will continue through the process going forward. And we believe that assuming that we execute on what we need to do, our likelihood of continuing to provide it is very, very high, because of the enormous investments that us and the rest of the partners are making in this deployment. But we don't believe there is a budgetary risk for this. This is a mission critical infrastructure, and we don't see a scenario where the government will not do that. We think that in that setting, us not continuing, as I mentioned earlier, is very slim. Bob, I don't know if you have anything to add.

I think you covered it, Ido. Just to be clear, Jack, we're assuming that run rate from the end of '24, beginning of '25, continues going forward. We're not assuming any growth in it, although I think that's conservative. But we are assuming that it's part of a sustaining contract together with the multi-billion dollar EHR deployment that the government undertook for the DHA here over the course of the last couple of years.

Excellent. That's really helpful. And then, Ido, you alluded to it before, but as we're thinking about potential expansion within the broader government customer, I think with the VA and others, what I think I heard you say was pretty much all of the heavy lifting on the R&D side getting done this year. So, when future expansions potentially happen, it's a matter of just turning on the software and some training at that point. There's not the big lift. Do I have that correct? And if so, just as a quick follow-up to that, how have your discussions gone with the Military Health System and others about potential expansion opportunities? Thank you.

So, yes, the short answer is, you are correct. Look, we're doing a lot of work today that is super relevant to the Military Health System, but will pay off to the entire sector. So, just a real quick headline, we are now creating multiple environments, a demonstration environment, staging environment, production, pre-production, across our entire portfolio, SilverCloud, Automated Care, and Converge. We are configuring all those systems. We are going through the elaborate and detailed cybersecurity hardening and accreditation of the MHS and the government. We are training a lot of users and administrators, and of course, we are going live in the sequence that I described and beginning to measure impact, which we are confident will be very encouraging going forward. Upscaling from there, which is contracted and budgeted fully, does not require any additional effort. It's an identical environment. And as I mentioned earlier, when we turn to the next government client, we are probably not going to repeat a lot of this work. There is a lot of similarity between this client and other clients in the segment.

Jack, I'll just add that...

Thank you so much.

The great thing about the project we have now is we're integrating into a brand new singular EHR across the DHA that was just implemented to the degree that, like in many health systems, you might have a customer in the government sector that has multiple EHRs and different environments that have built up over time, it wouldn't be as clean, but this one really is. And this is a great one to get going on. And all of the work that we're doing here relates to operation in that ecosystem regardless of what the EHR is.

Got it...

Maybe just to end with one last point which is an important takeaway. One, with the bookings that we shared today, we really have a very, very high degree of visibility into everything, into our full profitability in the '26. And something that is even more important, we believe that the mechanics and DNA of this transaction is going to be very typical to future transactions you're going to see in Amwell. Mainly, we are mostly selling, almost entirely selling software, which is very scalable and much higher margin than before. And if you can connect the dots and extrapolate from there, this really opens the new page and new era for Amwell, as we are really moving into software SaaS, almost entirely a world which is very different from where we were only a couple of years ago.

Got it. Understood.

Your next question comes from Charles Rhyee with TD Cowen. Please go ahead.

Yeah. Hey, thanks for taking the questions. Hey, wanted to touch on, you're talking about bookings, and one of your key initiatives, right, is to have the bookings acceleration. You mentioned Integris at the start as an expansion client. Can you talk about sort of the focus of the sales force in this next period? Is it really trying to expand services with existing clients or is there a focus on getting new clients on board? And just curious, going back to an early question, sort of receptivity in health systems who have not yet really thought of an integrated platform for digital capabilities, how high is that on the priority list at this point? And so, is the focus more on clients that are already committed to this strategy going forward?

Hi, Charles, that's a great question. The answer is both. Obviously, we have a very, very large installed base that is currently, even after migration, has a lot of room to grow in way of traction and additional solutions that we can offer through us and through third parties that we can resell to those customers. The demand and sophistication is growing almost daily. The appetite really depends on the type of the client. As I mentioned earlier, what's high on payers' mind is very, very different from health systems. Health systems are really focusing on savings and staff retention, while health plans have different aspirations as we tend to offering better outcomes for their clients and for their at-risk population through ownership of the member and better storage. So, we are so pleased that most of our clients are on Converge and it's going to only get better from here. So, this effort is winning. We know they are really, really happy. Our NPS is at all-time high. It sums up both patients/members and providers. The high 90s, it's very, very impressive. So, that's a great starting point to begin, as we discussed in the past, the dialogue of further expansion that are higher margin, and of course, will make our relationship more valuable, both for them and for us, and obviously more sticky. But there is a world -- big world out there of additional systems and health plans and even governments that don't use the Amwell. Typically, this entire market is very risk-averse. They are very, very careful. So, the value of the proof points, the referenceability of this enormous installed base that is now on Converge is our biggest asset. And we certainly plan to expand to also new logos and begin the journey of starting with what they need today and with our future-ready platforms, telling them more as we go. We see those relationships as really life-long relationships. It's not transactional. We are even hopeful and expect that some of the people that we lost during the re-platforming years are likely to come back as they discover the value of what we are offering today. But everything we discussed to bring us to profitability doesn't require anything dramatic or herculean, on the contrary. It's mostly based on what we already booked. It's entirely dependent on the quality of our execution going forward and requires very, very realistic work by our market-facing teams. That's not to say that we are not optimistic. We are usually optimistic. We just don't count on it to get to this very important milestone of profitable growth.

That's helpful. And maybe Bob, we think about the '25 sort of revenue guide here, it's kind of a step up of around $80 million. How much of that is really DHA? Because it sounds like with the enterprise expansion coming at the end of the year, most of that contribution falls into '25. You've got to give us a rough sense perhaps of how much from government versus backlog from existing clients.

Yeah. Look, Charles, I think the important thing there is a very high percentage, 90%-plus of that is contracted backlog. And I really don't want to go into too much detail beyond that in terms of what's associated with one client versus another. Clearly, this -- our work with Leidos for the DHA is a big component of that. But the most important thing that I want to communicate about this 30% increase in revenues and 70% increase in adjusted EBITDA is that a huge amount of that is predicated on contracted backlog, inclusive of what we're doing with Leidos.

Your next question comes from Jailendra Singh with Truist Securities. Please go ahead.

Hi, guys. This is Eduardo on for Jailendra. Thanks for taking the question. On the comment of achieving breakeven adjusted EBITDA in '26, I think you guys previously mentioned that you could get to breakeven on $400 million of revenues. Is that sort of indicating a ballpark of what you're expecting for '26?

Yeah. I mean, look, we've updated, I think, everything from a few quarters ago. Our mix, I would expect, is more heavily weighted towards software than prior. And so that has a meaningful impact on our gross profit margin and what's available obviously to cover operating costs. And so, the $400 million number I would view as kind of ancient history. And I think the important thing is that I'm really reluctant to -- we've kind of gone long guidance here in '24 and in '25, and talked about what has to happen in '26. It's pretty clear that we're guiding negative $35 million, negative $45 million on EBITDA, so that goes to $0 million-plus in the following year. I feel like we don't need to put yet another number out there for top-line in '26. But I think it's fair to say that it's lower than $400 million, given the change in mix that we're anticipating.

Your next question comes from Eric Percher with Nephron Research. Please go ahead.

Thank you. Bob, another question for you. I think you've flushed out the revenue side. I'd like to ask you to dig in a little bit more on the R&D commentary. And I think what I heard was a path to 25% to 30% reduction over time. Remind us how that kind of stair steps with Converge in getting to 70% of volume, what the step function reductions are? And then, what's the last part that with DHA there is mitigation but that's in the mid-teens? What was that mid-teen reduction?

Yeah, let me clarify, Eric. So, the Converge-related spending, so assume -- pretend there's no work for the government this year. We saw year-over-year high 20%s decline in '23 versus '22. I would expect that, that would have continued in the area of down 30% in '24. The spending, the investing that we're doing for operations in the government ecosystem will mitigate that decline to more like mid-teens as opposed to 30%. Is that clear?

Okay. That's helpful.

Yeah. Overall, declines are going to be more like mid-teens. If you segment that, it would have been down 30%. But the spending -- the investing on the government side takes it back up to mid-teens. And then, from -- going forward from '24, we get back on track for those declines. And by '26, we're envisioning a kind of run rate that's in that zip code of, call it, 25% to 33% of software revenues.

Got it. And at that point, you're getting the dividend from sunsetting anything beyond Converge?

Yes.

Perfect. Thank you.

Thank you.

Your next question comes from Jessica Tassan with Piper Sandler. Please go ahead.

Hi guys, thanks for taking my question, and appreciate the updates just on ACV by customer type. I guess just maybe can you help us understand whether the 4Q subscription revenue level includes kind of the CVS and Elevance or all of these large customer payer migrations that you spoke about. And then just kind of as those transitions or the migrations to Converge have occurred there? Is there any shift in the way you expect to recognize revenue from these big payer customers, like a shift maybe from subscription to visit that would have occurred alongside the migration? Thanks.

No. Short answer is no, Jess. There is no -- I think fourth quarter includes all the revenues from the customers that you mentioned. We're not charging for migrations. And just migrating clients alone won't change the type of revenue that they're doing with us or how we recognize it. What it does do, it puts us in a fantastic position to upsell those customers now that they're on Converge. And so, the revenue potential from them is much enhanced relative to them remaining on the legacy platform. So there's that. And then doing -- yeah, so I think that's really, I think, where you'll see the upside associated with the current base is we expect to be able to see increase at same store sales and expanding with those customers over time.

Maybe I'll just -- hi, Jess. Maybe I'll give you one example. So, the thing is public information. The go-live of Elevance, which was the largest migration we did in our history, included everything we've done before on Converge fully integrated with [Sydney] (ph). But in addition to everything we've done before and the different programs to enable, we enable a lot of things for Elevance, we also, in Elevance, who was public about it, begin to do virtual primary care. And we are currently very cautious in the way that we think about how to model this, but that interaction has enormous potential of same store growth and enormous value for Elevance. There are similar examples with other customers, some are public and some are not. So, the biggest opportunity with migration is increased stickiness with the customer, increased level of satisfaction, and an opportunity for selling additional solutions, and we're seeing a much significant ramp-up in volume because the experience is just dramatically different for the different participants for both providers and the members or patients.

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

Hi, thanks for taking my questions. Bob, I want to crystallize a comment you made earlier. It seems you expect DHA to be a steady contributor to revenue beyond 2025. Is that correct?

No question. That is our expectation.

Okay. And I guess if that's the case, where do you expect to pick up incremental growth...

I mean, Stan, it's no different than any other customer that we would sign. We expect that they'll be with us for a long time. I don't know why we would think about this one any differently, especially given the level of investment that we're making, right?

Of course. Just parlaying that into a question about 2026, if we're thinking about incremental growth in 2026, if it's not coming from DHA, where is it coming from? And what's your visibility there? Thanks so much.

It's a big wonderful world out there of customers and we expect to do a lot of business with all of them. We're signing new logos and we are expanding with our existing customers. So, yes, Stan, I mean, we're presuming success across our lines of business. But if you look at what the guide is for 2025 and then breakeven in '26, there's a probably about a -- the improvement there from a cash flow perspective is probably somewhere at 25%, 30% driven by costs, the balance driven by revenue and gross profit.

Got it. Super helpful. Thank you.

Sure.

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

Hey, this is Matt Shea on for Ryan. Thanks for taking the questions. I wanted to circle back on an earlier question about the referenceable base of customers. You have this nice base now, but also commented over the last couple quarters on how the sales team has been seeding opportunities with new health systems and payers. Just curious if that referenceable base is starting to make Converge less of an evangelical sale and more of a must-have best-of-breed solution? Or just ultimately curious how the wind down of Converge development in the new sales force design is increasing the velocity of those net new customer conversations?

Matt, this is almost not a question, it's almost like a statement which I wholeheartedly agree with. So, I would still maybe give you more color and details. The initial customers for Converge were super early, leading-edge adopters that were excited by the vision, understood the value, and signed up to be first to market with our platform. There are not too many of those in the market. They are essential, obviously, for any new platform to be accepted. We are very quickly reaching a point with all the go-lives that we have where we are becoming a very proven infrastructure that is scaling very, very well with very good proof points and metrics and a very safe choice in the market. And in healthcare especially, that's a really big deal. It's not only the value of the workflow and everything else, these are things like cybersecurity, which -- or regulatory compliance. There are so many things that you need to think about when we deploy an infrastructure for digital care for the entire organization. So, a few things happened. Our platform really matured and it's proven, but also the need for our platform in the market is much more palpable and clear today than it was a year or two years ago. We don't need to explain much about what we do and why it's important. The RFPs are detailed and long. People know what they want to buy. And we are invited to participate today more than ever. So, we are at the boring execution phase if you will, following an age of a lot of innovation and daring and dreaming. Now, it's really about we rebuild it. It's working really well and it's 100% about execution, efficient execution to generate the positive growth, which also means laser-focused on software subscription, high margin part of our business more than anything else.

Your last question comes from Glen Santangelo with Jefferies. Please go ahead.

Yeah. Thanks for taking my question. Hey, Ido, I was listening to the prepared remarks, and I think Bob said subscription revenues were down just modestly from Q3. And I think, Bob, maybe you suggested there was a decrease in -- from legacy platform. Maybe that was the source of the decline. I'm kind of curious about, from those customers that have already migrated over to Converge, with now with more than half your volume on Converge, like, what sort of your booking experience has been with those new customers? And is that sort of translating to some increased subscription revenues with those that have already migrated over to the new platform? Thanks.

Hi, Glen, well, a few things. You're absolutely right that what we see in subscriptions that are missing are the outcome of decisions that were made sometimes four or eight quarters ago. There is always a tail in the heart of re-platforming and we are experiencing this today. As I mentioned earlier, the results we see with people that have migrated are really excellent in way of -- almost any metric that you would choose. And as I gave a few examples, which are not atypical for expansion. The first thing that clients are doing when they're happy is to buy more and to use the platform more often. So, we are now in a just different reality than we were even 12 months ago where we are very optimistic on retaining and growing our Converge clientele. There are many, many ways to do that. But I'd like to point out again that nothing in our guidance assumes any dramatic thing beyond the reasonable, and that should not be confused with lack of enthusiasm which we share. We just don't want to put it into our guidance and focus at this point.

Okay. Thanks.

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

Thank you everyone for joining us this evening. Again, I'd like to express Roy, [my] (ph), Bob and so many other people in Amwell for your faith, for your patience as we went through the re-platforming. We are very excited to be in the growth phase of our company and really humbled by the opportunity to help wonderful people, including our women and men in uniform, and many other people that deserve better care than they get today. So, thank you again.