Summary
- Despite slightly higher revenue and adjusted EBITDA in Q4 2022, AMWL's 2023 projections were significantly lower than expected.
- Converge platform implementation is in progress, and visits on the platform increased to 28% in Q4 2022, indicating re-platforming success.
- AMWL's profit outlook is less than ideal, but if upsells are executed successfully, they may contribute to revenue upside in 2H23, which may trickle down to profit growth.
Summary
In 4Q, American Well Corp ( AMWL ) revenue came in slightly higher than expected, and adjusted EBITDA was 13% higher. However, 2023 projections were significantly lower than expected. That said, I was very encouraged by the progress of Converge platform. Visits on the platform increased from 16% in Q3 and 9% in Q2 to 28% in Q4. I think what else caught me by surprise was that that bookings made in advance would delay revenue recognition until 2024 - I was expecting it to come in 2H23. AAs for guidance, I think there is a change for earnings surprise as management is guiding to a 3% decrease in AMG, which does suggest conservatism. Overall, despite some concerns, I am still positive on AMWL progress, which should be supported by behavioral health as a significant growth driver, and also when CVS begins to ramp up. However, due to the current lack of information, I am maintaining my hold rating. For instance, AMWL may fall short of its adjusted EBITDA breakeven goal for a variety of reasons, and also a lack of better visibility into bookings. The former is an area in which management has expressed optimism, noting that the company is in a better position now than it was a year ago when it first outlined the path to profitability. This optimism has been fueled by the increasing customer adoption of digital solutions, successful completion of the converge transition, and the passing of peak R&D costs. With regards to this, I am also slightly concerned that AMWL won't be able to stay on track without a significant increase in revenue growth from the new revenue base in 2023.
Converge implementation in progress
The fact that there are correlated metrics indicating re-platforming success is encouraging. Importantly, platform utilization was high, with AMWL demonstrating growth on active providers. 4Q22 saw an 11% increase in active providers, to 107K, and 1.7 million visits, exceeding expectations, as AMWL noted a robust flu season that increased the number of urgent care visits. Although AMWL's revenue per visit fell, I expect it to recover modestly in FY23, as management is not expecting for a significant flu season and instead anticipates higher revenue visits as a result of Converge implementations. Scheduled visits, which had previously made up 70% of the total, now make up only 63% of the total, down from 70% in the previous quarter and AMWL expectation. I also expect this to slowly recover at the same pace with revenue per visits due to similar reasons. That said, while 4Q22 flu visits have become a commodity to some extend, the percentage of visits that occurred on the Converge platform rose to 28% from 16% in the previous quarter, 9% in the previous quarter, and 10% in the previous quarter.
All these aside, positive developments, such as those observed in R&D leverage, gave me cause for optimism. In the previous three quarters, R&D spending was over 50% of revenue, but it decreased to 34.9% in 4Q. This reduction can be attributed to the completion of the core Converge infrastructure and the release of numerous contract workers. As a result, it indicates that there will be continued S&M leverage in the following fiscal year of 2023 as the replatforming continues. Although metrics show that Converge is executing and making progress, the outlook for platform subscription revenue was lower than anticipated because of bookings, which cause delays in revenue recognition. Qualitatively, management has been optimistic about the growth of both new customers and existing clients, but the positive sentiment and utilization rates have not yet translated into P&L upside.
Outlook
Forecasts for FY23 were not encouraging. However, if Converge conversions continue without hiccups, 2H23 and FY24 projections may turn out to be understatements. That said, following a string of slightly below-consensus quarterly results, I think AMWL has set a conservative FY23 guide.
Specifically, for Converge, the timing between booking and revenue recognition is what I believe is to blame for the dismal forecast for platform subscriptions following Converge. We already know that AMWL is giving away free migrations to Converge while generating incremental income through upsells. Upsells, on the other hand, don't start bringing in money until after 5 or 6 months have passed from the time of booking. Although management has made encouraging remarks about the growth of same store sales bookings, the benefits won't be felt in revenue until 2H23 or FY23. That said, on the positive side of things, if upsells are executed successfully, they may begin to contribute to revenue upside in.
Another thing to keep in mind is that Platform transitions are going to have near-term pressure on gross margins. Regarding EBITDA cadence, the material step down in R&D costs in 4Q22 is anticipated to continue sequentially in FY23, which is largely responsible for the expected year-over-year improvement in adjusted EBITDA loss. While I agree that the profit outlook is less than ideal, I think that the potential for top-line upside in 2H23 may trickle down to profit growth.
Conclusion
While there were some concerns about AMWL's 2023 projections, the progress made in Converge platform implementation is a positive development. The increased utilization on the platform and the successful completion of the Converge transition are promising signs, although there may be delays in revenue recognition due to booking timings. On guidance, if Converge conversions continue without hiccups, there may be potential for top-line upside in 2H23 and FY24. Overall, I am still positive on AMWL's progress, especially with behavioral health as a significant growth driver, and CVS ramping up. However, I would need a lot more visibility than what we have today before investing, as such I am maintaining my hold rating.
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American Well: Still Lacking Visibility, Reiterate Hold