10’000 Hours
American Well (NYSE:AMWL) has had its share price crushed after the expected decline in demand for digital health care delivery in the aftermath of COVID-19.
Since the latter part of January 2021 when the share price of the company was trading just under $44.00 per share, it has since collapsed to a 52-week low of $2.52 per share in mid-May 2022, before starting to show some signs of a bottom when it had a double top of approximately $5.25 per share in June and August 2022, before falling back to trade in a range of around $3.40 to the low $4s.
While the company has shown some progress over the last year concerning total active providers and subscription revenue, its cash holdings have plummeted from $746 million at the end of calendar 2021, down to $333 million at the end of the third quarter. Including short-term investments, cash stood at $582 million at the end of the reporting period
In this article we’ll look at some of the recent numbers in the third quarter, and if its Converge platform will be enough to significantly improve the performance of the company.
Recent numbers
Total revenue in the third quarter was $69.2 million, up 11 percent from the third quarter of 2021. Full-year revenue guidance is to be on the lower end of its previous guidance of $275 million to $285 million.
Breaking it down by segment, subscription revenue accounted for $31.9 million, up 19 percent year-over-year, and an increase of 8 percent sequentially.
Management noted that subscription revenue growth is the key to its long-term path to profitability based upon wider margin associated with that segment. The strategy of the company is to focus on increasing growth in this segment faster than the business in general. I think it’s not only the strategy, but a necessity based on the cash burn of the business.
Revenue from AMG visit was $28.8 million, down 4 percent from the same reporting period last year, with average revenue per visit of $78; that was about the same as last year.
In its Services and Care, revenue was $8.5 million, up $3.1 million from the third quarter of 2021, and up $3.3 million from the $5.2 million in revenue generated in the prior quarter. Based upon historical demand, Services and Care is expected to increase revenues in the fourth quarter.
As for gross profit margin, it stood at 40 percent in the reporting period, down 350 basis points year-over-year.
Adjusted EBITDA, while still dismal, managed to slightly improve to ($41.9) million from the ($42.8) sequentially. For full-year 2022, AMWL upwardly revised its guidance by $10 million to a range of a negative $180 million to a negative $190 million.
GAAP EPS in the quarter was -$0.25, beating by $0.01.
The number of total active providers in the third quarter was 98,500, up from the 80,000 in the same quarter of 2021. Overall visits came in at 1.4 million, about the same as it was last year in the same reporting period.
Cash and short-term securities were about $582 million at the end of the quarter. while that sounds like a lot, the company, if it doesn’t accelerate the adoption of its Converge platform, is going to be under enormous pressure if it continues to lose money at the current rate.
Converge Platform
AMWL’s success or failure will be determined by how its new Converge platform is adopted by its current and potential future customers. It is reported nearing the end of its development phase, which required a lot of upfront capital to accomplish, and will require more before it’s completed.
In the fourth quarter management guided for Converge to be completed. Under that scenario, the company should be able to significantly cut back on spend, which should result in vast improvement of its bottom line over time, assuming it’s able to increase interest in the platform, along with continual customer wins at meaningful levels.
The strategy to grow Converge in the near term is to migrate its largest volume customers to the platform, potentially driving more revenue while increasing margin and earnings because usage of the platform generates higher margin.
In the third quarter Converge accounted for about 16 percent of total visits and is expected to continue momentum.
While the initial response and feedback are positive, there is no doubt that over the long term, how Converge goes, so will go AMWL; there is no fallback position.
It’s easy enough to see how AMWL plans on growing the platform by transitioning existing customers to it, but what will determine its long-term success, in my opinion, will be how much more market share it can win from new customers, and by extension, how much it’ll have to spend on marketing to do so.
Market and economic conditions
Like most sectors in the current economic conditions, AMWL’s customer base is facing financial challenges that are forcing them to prioritize spending more than usual. To that end, if the economy sours to the point it puts a significant damper on health spending over the next year or so, AMWL will face further pressure on the top and bottom lines, and if it’s prolonged, it would be devastating to the performance of the company.
My point here is that, even if this will be the future of medicine and health care, the road there in the short term is anything but assured. It takes time for these types of businesses to gain hold and grab market share from customers that resist change from the usual way of doing things, so any type of disruption in the process of change could disproportionately cause the transition to slow down, which would be detrimental to the share price of American Well.
Conclusion
AMWL has been showing signs of improvement after getting crushed once concerns over physical interactions between health care workers and patients significantly diminished.
Since that time demand for AMWL’s services from the end-user hasn’t been driven primarily by fear and concern, but more by efficiency, convenience and saving time.
While that is important to customers and health care providers, it isn’t the stuff that accelerates adoption of a relatively new way of interacting with health care professionals and others serving in the sector.
For that reason, AMWL faces an uphill battle to gain market share even as its cost inputs have risen. To be successful its Converge platform is going to have to stand out from its competitors and be fairly rapidly adopted by its customers.
The company is now in a race to increase revenue and the resultant earnings increase from the platform because of higher margin, while it attempts to shore up its balance sheet from the decline in investment in R&D. How much that will improve after anticipated increase in marketing expense will provide the clarity on how AMWL will perform in the future.
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