Good day, and thank you for standing by. Welcome to the Amwell Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sue Dooley, Head of Investor Relations.

Hello, everyone. Welcome to Amwell's conference call to discuss our second fiscal quarter of 2025. This is Sue Dooley of Amwell Investor Relations. Joining me today are Amwell's Chairman and CEO, Dr. Ido Schoenberg; and Mark Hirschhorn, our CFO and Chief Operating Officer. Earlier today, we distributed a press release detailing our announcement. Our earnings report 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 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 good evening, everyone. Q2 was a productive quarter for our company. It was marked by progress on many fronts. Our focus and execution are strong as we deliver on key strategies and financial initiatives. They support our guidance and path to accomplishing our goal of positive cash flow from operations in 2026. In a dynamic time for our industry, we believe that the drive to reduce the cost of care, while making it better and more easily accessible is going to broadly inspire and inform the spending priorities of healthcare organizations. Our goals at Amwell remain closely aligned with these priorities and our mission to transform healthcare with technology has never been more relevant. In addition, we believe artificial intelligence represents the most significant and rising catalyst to prepare the evolution of tech-enabled care. Our approach is to partner across healthcare to tech-enable our clients in order to help them evolve and deliver the efficiencies and better clinical outcomes they require. To begin tonight's call, I'd like to provide you with some more detail on our recent performance and I will discuss what we're seeing in the market. From there, Mark will review our financial results and our guidance. Q2 was characterized by client success, new client wins and progress in our efforts on our path to positive cash flow. Here are some highlights of tonight's news. First, together with our latest partners, we received the anticipated extension of our engagement to deliver our SaaS software platform powering the Military Health System's digital first initiatives for 1 year. We are proud of our track record with this important client and our on-time and on budget deployment. I would like to expand a bit more on our joint success to date. The MHS' legacy Video Connect System…

Thank you, Ido, and good afternoon to everyone on the call. I will begin this section by walking you through a few operating metrics and financial results from the second quarter and then review our guidance. The financial highlights for our second quarter include progress toward our key strategic initiatives. Our software revenue grew over 47% from Q2 of last year as we continue to drive strategic client deployments and meet important milestones. Also, we accelerated our adjusted EBITDA improvements for the 5th quarter in a row as we pursue our goal of cash flow positive during 2026. Most importantly, as Ido highlighted, we have demonstrated continued progress with our most strategic objectives. Specifically, we received the anticipated extension of our engagement to deliver our SaaS software platform, powering the Military Health Systems' digital-first initiative. We also built on the cost initiatives that put us further down the path to generating positive cash flows from operations during 2026. We have committed ourselves to executing these initiatives that will ultimately drive value to our company. So now let me share some of our second quarter financial results. Total revenue was $70.9 million for the quarter, which is 13% higher than Q2 of 2024. Normalizing for the sale of Amwell Psychiatric Care or APC, Q2 revenue was 25% higher than a year ago. Revenue mix here is the more important metric. Subscription software revenue was 57% of total revenue at $40.4 million, up 47% from a year ago and compared to $32.2 million from Q1. Similar to Q1 of this year, our Q2 software revenue benefited from a material uplift in subscription software revenue related to deploying our solution across the Military Health System. A significant portion of this was non-recurring and related to the timing of certain go-lives and the initial…

Thank you, Mark. Before we take your questions, I'd like to briefly wrap up. We entered Q3 with a strong sense of purpose and unprecedented focus on unlocking value in our company and pursuing our mission. To summarize, our solution is operational across the global military health system and the contract extension is in place. We believe this represents a model for our industry on the value of modernizing healthcare and the power of technology-enabled care. The extension is the foundation for important improvements in our revenue mix as we pursue opportunities to advance our market presence within both the commercial and government sectors. We have taken important steps to make our company leaner and more focused. These are showing up in quarterly EBITDA improvements. Our teams are focused and inspired by the promise of how artificial intelligence will transform and magnify their contributions to our company. As we bring our differentiated solution into a very large yet underpenetrated market opportunity, we are set to achieve our goal of positive cash flow from operations during 2026 as well as for long-term profitable growth for many years to come. With that, I would like to open the call to questions. Operator, please go ahead. Thank you.

[Operator Instructions] Our first question comes from the line of Stan Berenshteyn with Wells Fargo Securities.

I'll maybe try to turn this into a two-parter. But on the DHA contract extension, can you just share with us how does the revenue run rate of the extended contract compared to the pilot contract? And then related to this, are there any KPIs that you'll be measured against over the coming year that the government will rely upon to decide whether to renew the contract into 2027?

Well, just as a reminder, the DHA pilot, if you will, was a long time ago for our platform and it covered the first 5 regions. This initial deployment was very successful and resulted in a decision to expand globally to serve 9.6 million people. Both during the initial deployment and the global deployment, obviously, the client was extremely satisfied with the scale and results of how our platform is operating, which I'm sure was an important factor in the decision to further expand the contract today. I believe that our performance, as I mentioned, are going to continue to be at least as good as the performance that resulted in those important decisions. And we shared one factor, for example, where our platform was able to almost triple the traction of the system that was decommissioned before we installed ours. So we don't expect any major changes going forward. We expect to continue to deliver at least as well as we did until now.

Is there a dollar amount that you can share with us in terms of what the run rate is with this extended contract versus the outgoing pilot contract?

Stan, it's Mark. What I can tell you is that the annualized value of the contract today for the subscription revenue is slightly greater than what it had been based on the prior billings. So there's a small increase that the government provided for and that's what we'll be looking at for the next 12 months.

Our next question comes from the line of Charles Rhyee with TD Cowen.

This is Lucas on for Charles. I want to make sure, one, I guess, I'm backing into the expected subs revenue for 2025. One, does that indicate a decline of roughly $22 million to $30 million in expected subs revenue for 2025? And I guess what is driving that decrease? Is it the changed scope on the DHA contract? If you can give us any color there, that would be really helpful.

Yes. I think you need to check your math on the subscription revenue. We reflected the expected decrease from the extension of the go-live times for automated care and behavioral health, which had been included in our projections for 5 months of 2025. That results in the narrowing of the range that we provided in the prepared remarks a few minutes ago. That would be the only item that was taken into consideration for the revised guidance.

Got you. I'll double check my math on that. And then I guess in terms of thinking about your cash flow from operations breakeven target for 2026. How should we think about your ability to realize that target? Would it be through incremental revenue contracts in health plans and health systems, further OpEx? I guess if you could bridge the gap from where we are now until then, that would be helpful.

So Lucas, achieving this very important milestone that we remain very committed to includes multiple parts. They all revolve around focus. The first focus is product focus. You noticed that we divested APC. We are continuing to focus on our modern platforms and trying to deemphasize, divest older solutions that are harder to deploy and support and don't generate the same high-quality, high revenue results. #2, we match those modern solutions and modern platforms centered around the Amwell platform with the right market segments. So there is renewed focus on areas where our right to win is maximized to create maximum value for our customers, and as a result, also much higher margins for us. #3 and very importantly, is the focus around our team and our method. We talked earlier about some reductions in force that's related to flattening our company spends and layers, things of that nature that also connect to different ways that we operate that include liberal embracement of AI and other technologies and new methods like self-service for our customers that we discussed in the prepared remarks and a migration from very expensive one-time customization efforts into a much more centralized configured platform. The end result is a cost structure that is much smaller with a revenue mix that is much favorable with a value proposition that is much stronger, and in aggregate, give us visibility and confidence in achieving our goal as advertised.

Our next question comes from the line of Eric Percher with Nephron Research.

Congrats on the extension. Ido, I'd be curious for your take on the decision on behavioral and automated care. Do you view that as easily severable or do you think that they have to come back to it in order to achieve the goals here? And then, Mark, I'll have a financial follow-up.

Eric, I will never say anything is easy in our business or certainly as it relates to government agreements. Everything is taking the time it is due. But what we know for sure is that those programs were very well received and resulted in very good impact for the DHA. We have every reason to believe that the lack of inclusion of those programs at this stage for the next iteration is related to broad budget reason much more than anything else. Our platform is there and adding programs to our platform is how the platform operates. So we certainly have great expectations for those programs and other programs to be added later on because we know they generate important savings and important improvement in access and care for this incredibly important cohort.

Okay. And Mark, I wanted to make sure I caught you right on the comment that the guidance change, if I heard it correctly, at the EBITDA line reflects only the MHS scale change. And my follow-up question there, was there any pull forward to the first half that you expected in the second half?

So Eric, for your first question, the impact from the government contract is what had moved the top line revenue guidance. The flow- through to the bottom line is the net effect of that revenue being delayed and the positive impact of making reductions to our cost base earlier in June.

Okay. And then is there any element from the divestiture that was reflected in prior -- not reflected in prior guidance, reflected now at the revenue or EBITDA line?

No, none at all.

Our next question comes from the line of Jailendra Singh with Truist.

Congrats on the extension of DHA contract. So last quarter, you guys highlighted a lower than expected churn and then the selling season was showing strong demand across both payer and provider markets. Any update to share on the trends there? Just wondering if any of the recent macro developments, uncertainty and various regulations impacting providers are having any impact on your sales pipeline?

Well, we announced some nice examples of our market traction this evening. In addition to the DHA, we did win Blue Cross Crusader, Florida, which is a major Blue plan with our new platform that has significant upside as it's now going to serve this large audience and hopefully with more and more clinical programs. The market today is very focused on cost. There's no question about it. And the need for a platform that is very efficient in the way that it engages with the consumers and retain them and matches them with the most optimal clinical programs with the ability to track the savings and make amendments and optimization is certainly something that people pay attention to. Our clients are also very aware of the enormous potential of using AI to achieve those goals and our ability to embed it liberally pretty much in everything we do in an iterative process is something that we believe is a factor that really is helpful in our conversations in the market today. So overall, we are really encouraged by our dialogue. We're encouraged by what we see. I think the market is seeing the traction that we have and the size and scale of what we are winning and that's a serious consideration. People look at Amwell as a trusted partner and people look at our solution as future-ready and able to deliver on important savings in time where savings are really celebrated.

Great. And then a quick follow-up for Mark. And apologies if you covered this already. How should we think about R&D expenses into next year? And does the extension of the DHA contract change your existing plans for R&D point of view?

Jailendra, we noted in the prepared remarks that we would see at least a 10% decrease year-over-year 2025 compared to 2024. That focus of decreasing our cost base and making it as efficient as possible will continue through 2026 as there is a required contribution from cost savings in addition to top line new revenue in order to achieve that cash flow breakeven from operations in 2026.

Our next question comes from the line of Ryan MacDonald with Needham.

This is Matt Shea on for Ryan. Congrats on the DHA extension. If the DHA wanted to reinclude automated care and/or behavioral health in a future extension, would that be relatively turnkey given the prior implementation work or what would that look like? And then maybe beyond behavioral health and automated care, how do you think about incremental programs you could sell to the DHA in future extensions? And would that implementation work be similar to how you launch programs in the past where it would start with a few sites before scaling or could it be quicker now given your existing footprint within the DHA?

Matt, thank you for this question. And based on the question, I know you know the answer, but I'll reconfirm it anyway. You're absolutely correct. Adding those programs, we are ready. Those programs are deployed in GovCloud. They're certified. They generate good results. it's almost a flip of a switch once the DHA or other government entities are interested in including them. The whole point of the Amwell platform is making it easy to add clinical programs, whether it's Amwell clinical programs or third- party clinical programs. And as you do that, you don't forgo the elegance and effectiveness of having one pipe, one consumer experience that navigate to all those different clinical programs with ability to have common data set to report and optimize the outcomes. So we certainly expect all our clients, and the DHA is no exception, to use our platform to add more and more technology-enabled care programs to really benefit from the savings and improve the clinical outcomes that they bring.

Got it. That's helpful. And then maybe based on the past couple of calls, you've talked about just broader optimism about the government pipeline in general. Would love to just get an update on that and kind of how this DHA extension maybe serves as a beachhead to keep penetrating that end market?

So Matt, I would say only this, we definitely have very strong validation now in the government sector. We have good results and ability to scale on time and on budget. We have amazing partner in Leidos and other people that are part of it. And this configuration of the relationship between Oracle, Leidos, us and others works really well and could be very relevant to adjacent organizations. So we think we have a very nice opportunity both within the DHA and outside the DHA in similar environments to reproduce the value that we created. And I will stop here. I think that time will tell the extent and the time line of those additions, but we are certainly optimistic.

Our next question comes from the line of John Park with UBS. I'm sorry, John Park with Morgan Stanley.

I'm stepping on for Craig. I wanted to ask about the third-party clinical solutions that you guys offer. Did this -- did the offerings and the third-party solutions contribute any material effect to gross margins? And could you also remind us what the value prop is to go through Amwell while accessing these partners versus going directly to partners?

Thank you, John. This is a great question, which I'm happy to answer, of course. As you know, many of those clinical programs operate today as a stand-alone, which means that the sponsors need to integrate them and engage patients separately. So if you have an MSK program, for example, you need to hear from the MSK vendor independently, they need to acquire the consumer, then they need to report on the results and this result is not integrated with the whole person with integrated care. And in some cases, the back problem may have some relation to your compliance as a diabetic patient and so on and so forth. So our ability to basically create one type of engagement that is extremely personalized, delightful and easy and then connect that in a very simple way to the entire set of elements, the entire care continuum through various program is extremely helpful, first and foremost, for patients and members, but also very efficient in way of customer acquisition cost. In addition to that, many of the sponsors are struggling to stitch together the outcomes, things as basic as identity of members between the different programs is a real struggle. We solve for that. So we add -- we bring a report that brings together all the programs so you can see your entire individual, and of course, the entire cohort as well. From the vantage point of the clinical program vendor, when they are integrated on our platform, they get a steady stream of members that they didn't spend to acquire, if you will. And in addition to that, they can refer the patient and also get referred patients or members to them in order to basically treat the patient holistically and that creates stickiness. So I would say that in essence, the -- our ability to create this ecosystem and allowing the sponsor to take out vendors that don't perform and replace them very easily without changing the experience and the infrastructure for the members is really helpful for all players. As it relates to the business model, because we are saving so much for each clinical vendor, they are happy to share with us the enablement revenue of bringing these patients to them and that translates into high margin, very sticky revenue for Amwell without taking anything away from the cost to the sponsor. The cost of the sponsor remains the same. So it's really a win-win-win for all parties.

Great. I had a follow-up to the earlier question that was asked about macro. It seems like there's a lot of factors going on both in the provider and payer level. Have you seen this translate into any type of like sales cycle elongation or perhaps pricing changes just to capture their attention?

I would suggest that the main change is the focus on the different unmet needs. If at times in the past, member experience, clinical outcomes were the discussion starter. In the market today, it's all about cost savings. If we're able to create a much more efficient experience that results in better not only clinical, but also financial outcomes, that wins the day. And we can do that and we've done it for many years. And with recent enhancements and technology, we can do it better than ever and we're going to get -- make it better and better every quarter and every year to come. And our ability to do it in a dependable way, I think, is a key factor in decision-making that makes the sales cycle be relatively at least as good as it was before, if not accelerating. Our ability to make it very easy for our customers with modern platform to deploy and to configure their solution through self-service, I think, is another factor. It's easier to work with Amwell. It's easier to deploy with Amwell and it's easier to get support very quickly to what you need. And these are some things that are coming up again and again in conversation in the market today.

[Operator Instructions] Our next question comes from the line of Kevin Caliendo with UBS.

This is Jack Senft on for Kevin. Similar to Eric's first question, on the DHA contract, you mentioned the renewals only for 1 year. I'm just kind of curious, do these renewals typically happen in 1-year increment or was this kind of more like a stopgap funding type of renewal to keep care continuous just given the initial leadership change? Just curious if anything surprised you here.

Well, Jack, as you can imagine, this is a much larger vehicle that includes much bigger participants than Amwell, including the EHR deployment for the DHA. So this negotiation, which we were not part of between Leidos and others and the DHA that included even higher up like the Pentagon is something that had many budget consideration, very broad budget considerations that we were not part of. We know our solution is very helpful. We know it's sticky. We know it's needed going forward. And we believe from where we sit that we're going to continue and serve this and other similar clients for many years to come. You're right to suggest that typically, those agreements are multiyear. We're seeing this year with the new administration in place and the new flavor of negotiation, they wanted to create this vehicle and to continue to negotiate going forward and that resulted in where we landed. We don't think that reflects in any way their perception on the value or the readiness to work with Amwell as a partner for many more years.

Okay, understood. Just a quick financial follow-up then. Gross margins expanded from last quarter. As we look into second half, what are your expectations on gross margin from here? I think you mentioned -- I think maybe last call that you expect them to expand going forward. But I mean adjusted EBITDA still looks a little flattish just given everything you guys talked about. Can you just kind of walk us through how we should think about gross margins going forward? And then maybe if this should continue into next year?

Yes. The margin range will likely remain consistent with the guidance that we gave at the beginning of the year. The second quarter's margins were positively impacted by a significant amount of implementation work and software revenue that we were able to recognize. So we will, in fact, be somewhat flattish for the remainder of the year. And when we come into the beginning of 2026, we'll give guidance for margin direction at that point.

And I'm currently showing no further questions at this time. I'd like to hand the call back over to Ido Schoenberg for closing remarks.

Thank you, operator, and thank you, everyone for joining us this evening. We really appreciate your support and your attention. Have a good evening.

This concludes today's conference call. Thank you for your participation. You may now disconnect.