Q3 2023 American Well Corp Earnings Call
North wells expanding use of our automated programs now extend to 35 specialties addressing many operational challenges with powerful results.
For example, with their automated programs.
North will reduce colonoscopy no show rates by 48%.
Capturing 800, more procedures and $1 million in additional annual revenue.
The reduced readmissions by 32% close gaps in care in 69% of the interactions and identified high risk pregnancies in 16% of routine automated monitoring interactions and importantly by leveraging automation North wall is the law.
<unk> providers to focus more on patient care, boosting staff satisfaction and retention, while increasing productivity.
Finally, our virtual nursing discharge solution is delivering for clients in.
In the first months of deployment University of Pittsburgh Medical Center successfully completed over 1300 virtual discharges saving about 40, 12 hour north sheets, while registering high patient satisfaction scores.
We are rapidly documenting and sharing these client success stories to case studies webinars and events.
We believe these proof points will inspire other clients and prospects to view or a converged solution as the Mustang.
I would like to close my remarks with a brief comment.
Today, we have a front row seat as we partner with the most strategic players in health care as they strive to own and optimize the patient and provider experience.
After years of internal investing and struggling with fragmented idea assets healthcare organizations are increasingly turning to us they recognize the value of a partner who can speed the path to the REIT hybrid care modalities to achieve their goals.
And with our DHA when we added yet another name to the strategic clients that are choosing <unk> as their partner.
As I think about our company I believe we are at the turning point, leaving.
Leaving behind US many of the risks of re platforming and rapidly putting in place the strategy is to pursue our market opportunity and realized profitable growth.
We have shared many green shoots with you Tonight.
As we emerge from this time of transformation.
It is clear from our vantage point the market is moving to us.
With that as context, I would like to turn the call over to Bob to review some of the DHA specifics, our Q3 financials and key metrics plus our guidance.
Bob.
Thanks, Ido and Hello, everybody.
I would like to walk you through a few operating metrics and financial results from the third quarter as well as our guidance than I am eager to provide you with some more context regarding our DHA when building on our press release issued last month.
All our financials continue to reflect our transition to converge our business move meaningfully ahead. This quarter in terms of client migrations are growth transformation normalizing rationalizing costs and of course, the DHA win.
To review, we ended the third quarter with 104000 active providers flat compared to a year ago. This represents a slight decline from last quarter as <unk> re platforming efforts temporary declines can occur we continue to view at that providers as an important indicator of the sustained value our clients CNR.
Platform and we anticipate that our number of active providers will increase as we migrate existing and implement new clients onto converge.
Total visits were approximately $1 4 million in the third quarter about equal to last year scheduled visits represent represented 65% of the total in line with our experience over the last few years as it relates to visit volume patterns. We continue to believe that we are returning to more typical seasonality.
With second and third quarter is lower than the first and fourth which was less apparent during the pandemic.
We continue to make good progress successfully migrating our clients to the new platform in Q3 successful migrations drove visit south converged for the quarter to 50% up from 43% in the second quarter and crossed the 50% threshold one quarter earlier than our target.
And as <unk> said, hey, our migrations have begun given payer visits are tied to the enrollment cycle at year end, we expect to see payer related visits transitioned to converge beginning early next year.
Total revenue was $62 million for the quarter about flat to last quarter and down 11% from a year ago, approximately 50% of that decline in revenue versus last year was subscription related driven primarily by legacy platform declines with the balance split between lower visit and service.
Susan care points revenue.
Subscription revenue was $28 $4 million in the third quarter up slightly from Q2 <unk>.
AMG visit revenue trended, 7% lower than last year and was $226 7 million AMG visits were 8% lower versus the third quarter of 22, reflecting a return to normal seasonality with last year elevated due to COVID-19 influenced volume.
Average revenue per visit was slightly higher than last year at $77 driven by better urgent care pricing.
Our services and care points revenue was $6 $8 million for the quarter, which represents an increase of 8% from last quarter driven primarily by growth in marketing services. These revenues are lumpy from quarter to quarter due to customer buying patterns for our marketing programs and for care points as well as <unk>.
The timing of professional services that precede deployments.
Turning to profitability, our third quarter gross profit margin was 35% down from 39% last quarter and 40% last year largely on a revenue mix shift away from higher margin implementation services to.
Marketing services, which are strategic to our clients, but lower margin.
Turning to operating expenses, we are applying.
Ongoing cost discipline across our company.
We are tracking well on our path to R&D normalization, while GAAP R&D expense was 7% higher versus last quarter at $27 $7 million. It was 16% lower after adjusting for $7 1 million of capitalized software costs in the second quarter.
This was 24% lower than the third quarter of last year as we have discussed we believe that the fourth quarter of 'twenty. Two represented our peak R&D spend and that we will exit 2023 within R&D spend down mid 20% from this level.
Sales and marketing spend declined 5% and G&A expense was 19% lower this quarter compared to last quarter. We continue to expect SG&A to decline approximately 10% overall for the second half versus the first half of 2023, primarily due to lower stock based compensation expense.
As <unk> outlined we are streamlining and rationalizing our commercial head count in keeping the growth changes, we do not need to spend more in SG&A to achieve our growth goals and there is healthy operating leverage as we scale.
Adjusted EBITDA for the quarter was negative $38 5, million% to 15% improvement on last quarter.
Also we recorded a noncash goodwill impairment as a result of the decline in our market capitalization as compared to the carrying value of our equity as of September 30th in arriving at this amount we estimated the fair value of our equity based on our market capitalization and our related control premium.
As a result of this interim quantitative impairment assessment, we recorded a $79 million noncash goodwill impairment charge.
Transitioning to the balance sheet, we ended the third quarter with $418 million of cash and marketable securities. We have a substantial cash position, which provides us ample resources to complete the transformation of our company with converge and take us to profitability with a substantial remaining balance.
Concluding my review of our financials and turning to our outlook. We continue to believe that revenues for 2023 will be within our guidance as shared on our second quarter call I would like to speak for a moment on how we're thinking about our EBITDA in the fourth quarter <unk>.
Regarding the DHA, we have a rapid deployment timelines for this critical work and our work is underway the spend is incremental to our prior assumptions for the fourth quarter underlying our adjusted EBITDA EBITDA guide for the year. We expect this investment will be in the area of $2 million in the fourth quarter and as such we are adjusting our.
Our prior 2023, adjusted EBITDA guidance by $2 million.
To a loss of negative $1 62 to negative $167 million from a loss of negative 160 to negative $165 million.
We view this incremental spend as a high priority as we undertake the important development and deployment work with our <unk> partners and the DHA to build and deploy converged for the military health system.
With my financial review and guidance complete here is some additional detail on <unk> important role in the DHA is digital first initiatives and the powerful catalyst this win represents.
We're honored to be we are honored to have been selected to support a multiyear transformation of DHA as care delivery model. The task order awarded to the lightest partnership has a 22 month period of performance and is valued at up to $180 million. It includes several parties in addition to.
<unk>.
Under the agreement the partnership <unk> will deploy multiple automated care and digital behavioral health solutions and replace the legacy military health system video connect capability with <unk> converge starting with an initial phase during 2024, followed by a full enterprise role.
<unk>.
<unk> represents a meaningful portion of the task order allocation, but we are not in a position to disclose specific amounts related to AML or any other partner. However, I can share today that <unk> total allocation of the task order a sizable and includes predominantly software revenue in the initial sale.
It also has professional services component related to deployment.
This win meaningfully adds to our total addressable market extending our reach into the U S government healthcare and public sectors to provide some additional context, our subcontract with light OS was finalized quite recently and so there will be no revenue impact on Q4, but the initial five site deployment does.
Add to our visibility as we consider next year's guidance, which we will share in February.
There are a few important things to keep in mind regarding scope and timing.
The initial phase of deployment Standalone Fortifies, our long term model and positively impacts our cash position.
The enterprise rollout outlined in the award would involve a meaningful expansion comprised of nearly all recurring subscription software revenue.
As <unk> mentioned earlier this will place the U S government.
Our largest customers as early as 2025.
Regarding the enterprise wide potential DHA has a beneficiary population of roughly $9 6 million service members retirees and family members and manages authority direction and control of nine medical centers 36 hospitals and 525.
Clinics across their global enterprise.
I would like to take a moment to share what we can about the investment associated with this effort, which further supports our commitment to the government sector.
Together with a partnership we will build and deploy a secure comprehensive and integrated platform that will be configured for operation in the accredited government cloud infrastructure.
Upon go live of the initial phase of deployment the platform will be fully scalable and ready to deliver complete hybrid care across the entire enterprise without additional future development required the.
The investments associated with the initial phase will continue through 2024 and are incremental to our planned R&D spend importantly, the initial phase of deployment is cash flow accretive on its own over the 22 month period.
As we proceed into the enterprise rollout, we will try to provide updates as specific milestones are behind us wrapping up we are honored and privileged to have been selected to serve this important community.
Building on the validation we have from other major players in the health care industry like <unk>, Cvs and others. The DHA can be a powerful catalyst for us as we exit our time of transformation to converge.
To briefly summarize we are encouraged by progress in our business. We have strong validation of our approach success migrating clients and we believe we have the right initiatives in place to enable our growth organization as we enter the fourth quarter bolstered by the potential that our DHA win represents.
We are confident that our broader growth initiatives will advance us along our path to profitability.
Thank you for listening with that I'd like to turn the call back to Ito for some closing remarks.
Thank you Bill.
With Q3 behind US we are focused on three key areas of execution as we look to close out the year in a strong position setting up for 2024 first we are finalizing our growth transformation.
Second we will continue migrating clients onto converge.
And finally, working with our <unk> PTH partners. We are beginning the important deployment work supporting the DHA is digital first initiatives.
Before we take your questions I'd like to share an insight from our time spent with clients in the market this quarter.
Healthcare remains one of the final frontiers for optimizing through technology.
Early days for our industry as we evolve towards hybrid care delivery, but we believe the industry is ready for this change.
Well, we are drifting everyday to inspire and enable our clients to evolve their approach to hybrid care as we pursue our mission and drive toward profitable growth.
With that we're ready to conclude our formal remarks, thank you for listening today.
Operator, please open the line for questions. Thank you.
Thank you Dr Schonberg ladies.
Ladies and gentlemen at this time I would like to remind everyone that in order to ask a question. Please press star and then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A Q&A roster and as a reminder, we please ask that you limit yourself to one question.
At a time.
Yeah.
We will go ahead with our first question from Craig Hatton Bach from Morgan Stanley.
Your line is open.
Okay.
Thank you congrats on the DHA win.
And in particular in terms of the rigorous evaluation is there anything else you can share in terms of the amount of solutions. Besides AMOLED is being evaluated.
Thank gave you the biggest hedge to that deal.
Alright, great. So on price will give more color.
We've been on the the DHA for for a long time.
Market to serve the U S Navy five years ago.
And we participated in numerous spiral.
Therefore towards the relatively short.
But very very a deep evaluation of very robust.
The nature of the way that the.
Prime Contractile works is such that we are not privy to other options in the vendors and we are not a believer.
Believing as we known.
So sure of that but.
But I can share with you that they did look at every detail in the plan for the following.
In there.
What what they did share with us during the award process and the selection process.
They were very impressed with our mature T. In fact correctly do we serve very very large clients and strategic in their size and even the bigger.
I think they like the note of the elements of the technology of course this call its way to shore to describe the list is pretty long I can give you just one example, maybe.
We are able to have a dynamic.
Scheduling for a provider we call it the dynamic provide a queuing.
And Thats allows when this system is deployed globally.
Salary in Hawaii to seek care is very close if it's available but no. It's based on multiple fairly complex rules, we can expand the reach really anywhere around the globe and make sure that they have a much better access to care.
In addition to that.
<unk> DHA.
Chase were very vocal.
Including the Secretary.
Lloyd Austin, and the director of the DHA to link across Lang.
About the importance of taking care of people they call it kick up and they talk much about the crisis in access to be able health services, the chronic care to wellness.
And we have all day, so the comprehensiveness of the offering in the converge it matched very well the need the all the clients.
I would add maybe one more element.
This is really a partnership that includes many really good participants, including our long time partner Oracle Cerner.
<unk> debt.
Worked and integrated with Oracle Cerner for many years I think was also helpful for the client to feel that the risk in this deployment is lower and we can all work really well together.
Great Thanks for sharing that.
Yeah.
Thank you for your question.
Our next question is from Stan Bernstein with Wells Fargo Securities. Your line is open.
Hi, Thanks for taking my questions.
Maybe on the guidance.
Have a pretty wide implied ranch on the fourth quarter can you just walk us through what what's driving the upside and downside of that range.
Hey, Dan.
Bob It's Bob here.
So we.
I think we are.
Left the guidance in place.
Primarily because the.
The fourth quarter can have some pretty large swings on.
In visit volumes.
We saw that last year.
When we had an early and severe flu season.
Drive some pretty.
Pretty meaningful volumes.
So we opted to leave that in place.
That would really be.
The factor that might move things around within the range and as you saw we also widened out a little bit.
On the cost side associated with the DHA.
Got it and maybe just a quick follow up on that.
Should we think about the incremental impact of the R&D spend as we model 2024.
Yes.
I would say on that.
We've.
We've done I think a real good job in.
And delivering on the cost savings associated with R&D as we progressed through the year.
And I think we'll continue to see those types of declines through the end of the year.
Next year away.
Away from the spend associated with.
With the DHA contract and customizing and implementing.
And integrating there.
We would continue to be on a path towards normalization in that 25% to 30% of subscription revenue.
Over the next couple of years, so that is proceeding as planned.
As we kind of get into the budget.
Budgeting.
Come to the end of the budgeting process.
And are working very closely.
With our <unk> partners here on the deployment I think it will be in a much better position to guide on.
On spending.
For next year incremental to to what.
What we've what we've had out there.
Great.
Okay.
Thanks for your question. Our next question is from Cherilyn dressing with Truest Securities. Your line is open.
Thank you and thanks for taking my question.
And congrats on the Doj contract.
Hello, There my question is around the <unk>.
Kind of core business, where you talked about in the past.
Staying on your provider clients buzz as they're trying to deal with some no stopping short dated and improving patient experience and you guys have called out on our sales process getting elongated just curious if you can provide any update there have you seen any improvement in trends and a little bit more color around capital spending from from your provider.
In particular.
Okay.
Hi, Julien this is the email.
Essentially there is obvious.
Pressure in the market cost pressure that is apparent to anyone that is there.
With the converge, especially we have lots of proof points around critical pathways that are relevant both in times of prosperity, but even more relevant in time, where the budget is a tight I.
I gave a few examples in my prepared remarks, so high level, we are able to prove the two are helpful.
In improving things like staff retention and member.
Tension.
We have long list of.
<unk> two impact efficiency.
And I gave a few examples for that as well and we have a ways to expand.
<unk>.
Products or services that our clients can offer and drive the top line for our customers. So it's more of those proof points.
<unk>, becoming available in the market.
We position growth organization, having an easier in either time to articulate the rationale behind those investments even in time of course pressure I would also add that we see quite a bit of consolidation in the market, especially in provider array market and <unk>.
<unk> services are really effective in its Tony.
Those organization. So it's a very good way to integrate a lot of your digital assets and that allows you to do many things.
<unk> has some serious cost savings and a ability to create immediate integration of data and services that seems to be very a high priority.
Type of organizations.
I'd also add.
And lastly that the stuffs pressure.
Really significant.
Nurse shortages, especially.
The digital discharge that we have with many other programs.
Are hitting home with many of those customers and allow them to basically.
Span the reach all day.
Staffed.
In such a short supply during this.
So overall this is not a.
A luxury product in the add on innovation type things like telehealth used to be a few years ago. This is a necessary.
Day to day infrastructure, but he has now proven.
Two to improve.
Financial performance for customers and again, we have the actual proof points and some of them were shared with you today.
Okay.
Thank you for your question.
Our next question is from Jack Wallace of Guggenheim Securities. Your line is live.
Thank you.
To follow up on the.
NHS.
And you're thinking about some of the upfront spend.
Particularly on the customization at.
It sounds like you have Bob you mentioned that there is an element of that that was going to be.
Cash flow accretive and then I just wanted to confirm that one of that was from an upfront spend standpoint, or if there is a margin on the professional services component.
And then second.
That would be.
Much of the upfront build here would be transferable.
In the instance for say the VA would also have a similar type of award and this would make for an easier plug and play opportunity there. Thank you.
Hi, Jake I'll take the second part of your question and let Bob do the first part.
So in the initial phase we will do a lot of work.
To integrate into the Gulf cloud the government cloud.
Char Genesis.
And comply with many rules and regulations for this unique environment, including cyber security and other.
Nothing in this work is.
In our opinion the work is very clear we know what to do and we are very comforted by the enormous experience of other partners like <unk> and Oracle.
That Oracle Cerner that they are very familiar with the environment and are going to do the work.
Together with us.
This work is directly relevant.
For clients, who are potential clients, who are not included in this past quarter first and foremost the VA.
As I'm sure you know the images video connect the one that we are replacing and modernizing.
For the DHA is really a derivative of the VA video comex.
And the EHR the risk is very similar.
To the one we are integrating with.
Very much like the DHA. The VA is also very very large it's actually larger.
Then the DHA to 172 medical centers over a thousand clinics and about 90 million enrollees and remains so.
And there is another really important point, which is the <unk>.
System is built for four continuing if you will care I mean, essentially there is movement between those two way population that is important and thats why many ways. These organizations typically a truly similar array of solutions. So we believe that that initial airport will position us.
Very well to compete.
For the business say over the VA and other public entities.
Maybe you'll take the first question, yes, so thanks Jack.
Thank you for the question.
The initial this is think about it in two phases. There is an initial deployment phase and then.
A full enterprise rollout if we just think about the initial deployment phase.
That in and of itself is is cash flow accretive to <unk>. So that's a positive.
Positive cash generator for us.
Over the 22 month period of performance and.
And to go from the initial deployment to the full enterprise deployment.
And thats to the full $9 6 million.
Sure.
People that that the DHA provides care to.
Across the 47% or so hospital and medical centers and the <unk>.
525 clinic.
Clinics, there's no incremental investment required to go from that initial deployment.
To the full to the full enterprise rollout, so youll see all of that come on without any incremental spending.
To bring that on it's it's basically to bring the first medical center on.
We're going to spend just about everything we need to spend so so thats, how you should think about it.
That's helpful. Thank you.
Okay.
Thank you for your question. Our next question is from the line of Ryan Macdonald of Needham and company. Your line is live.
Hey, Thanks for the question and congrats on the D. H a win this is Matt on for Ryan I wanted to touch on the active providers. So was surprised to see client providers ticked down again in the quarter. Just curious was there any churn within that to call out or just re platforming and with empty.
Percentage of visits now on converged should we expect to see that number start to increase sequentially now and then on the AMG side also was just curious what drove that decline and if theres any gross margin benefit from less AMG providers.
Hi, Matt I'll take the first part in that.
Bob.
Continue.
The second so we talked a lot in previous quarters about what we've got fully means.
You have some of your clients in the legacy some of them are migrating there is an element of churn, but we talked about it in <unk>.
Very much.
Growing really in the rear view mirror and where we stand right now with more than half of our volume already on the converge a per design when you move from one environment to another.
You lose people quite quickly, but you gave them a little more a slower.
So the answer to your question is that we certainly a plan.
To see continuing growth in our.
Our activewear provider and I think Bob actually said that in his prepared.
Remarks, as you May remember there are big deployments.
Also this year, but certainly early next year.
All are going to increasingly contribute to raise this number.
But when you take the second part.
Yes.
On the AMG side, I wouldn't read too much into that.
The number of active providers there are $10 99.
There is some.
Impact.
From a from a gross margin perspective, as we think about.
Ramping up panels for our APC business.
We need to have.
We have SLA is there we need to have.
Availability for.
Subject to those those SLA is so that can actually have.
Having too many.
Too much capacity there can be negative.
From a from a gross margin perspective, but.
Away from that on the urgent care side.
I don't.
Wouldn't read too much into it.
And we can be adding.
Some of our customers we're building platform.
Platforms to activate their doctors.
<unk>.
And so we can be growing on that side of the business and you wouldn't see that.
On the on the Aam's AMG side so.
Sure.
I think that addresses your question, but if it didn't let me know.
Matt. Thank you for your question.
Our next question is from the line of Charles <unk> with TD Cohen.
Your line is live.
Yes, thanks for taking the questions.
Maybe I know you touched on it kind of tangentially, but just wanted to get an update sort of how.
Bookings for next year are trending here through the third quarter, particularly as you've kind of changed sort of your go to market strategy.
Maybe any update on the progress of this implementation of the new sale.
Salesforce focus on ROI.
Hi, Charles with the video thank you for your questions.
Where we stand today.
We have been.
Very good staff.
On the on the converge and very happy customers. So that's a really good starting point and we have a healthy pipeline, but very importantly in the same way that we conformed our platform really transformed our growth organization.
To grow.
Rohit.
Exactly and meaningfully.
Over the next few years, so to give you more details as you requested.
The first thing we did is upscaling of team.
People.
And we are now focused on we did some research and thinking and are focused on market segments and sub segments.
Where we are very strong right.
When.
And to maximize really the value and impact on profitability.
A good example is our very encouraging hit rate with very large strategic customers.
People tend to forget that we completed converge only this summer and we won't not one not two not three but actually before or very large strategic customers on our platform that just the emerging into the market so that definitely.
Very good.
Good sign.
We improve day or a methodology the way that you operate in sales the operation we would need a lot of work there.
And we really optimize and increase the clarity of our array of communication.
We sell today is very different.
And what we sold with the legacy and I think we're able to communicate.
More clearly today.
Very importantly, we build an infrastructure.
It allows us to capture and report two points.
One of the beneficiaries on these calls, but we have lots of other places and especially with clients, where we can really show the value of the different utilities in the new way of platform.
As you asked in your question.
We build a whole new solution organization.
That allows us to really have a dialogue with customers to understand their issues and build solutions that are right for.
For them.
It's really more of a slogan we are not viewed as just a vendor we are viewed as a partner.
We are helping to transform those organizations and they do need help as they need to do a lot of important things.
Lastly, we shared that he brought some.
Very capable leaders very mature and experienced leaders.
Across all organizations with especially with growth led by Cathy Weiner.
From the United.
And we improved the way that the different units of the company between product delivery and growth.
Working together as one team.
So overall all those airports it translate in our opinion to very good level of readiness to.
To begin to grow our pipeline and converted.
Foster much faster than we did before.
Thank you for your question.
Our next question is from Glen Santangelo with Jefferies. Your line is flat.
Hi, yes. Thanks for taking my question, Hey, I just wanted to come back to some of the comments you made in your prepared remarks, I mean, now with 50% of the visits now migrated to converge you seem to suggest in your prepared remarks that these migrated clients are scaling.
<unk> rapidly and you sort of talk about all these proof points, but what I sort of take that back to subscription revenues. It seems like the total subscription.
Subscription revenue number has been stubbornly stuck in that high <unk> number for a good number of quarters and so I'm trying to.
You get a better understanding for these already migrated clients like what the upsell opportunity looks like into these converted customers or is that not the right way to think about it should we should we think about it more that.
This just strengthen those relationships and it's really about sort of winning new business.
Well, Glenn Hi, there are multiple things here. One is we seem to have legacy in the rearview mirror and legacy.
With.
<unk> the pain points.
Yes.
Drawing expenses.
Not developing the way it should because it's.
Basically.
A platform that is going to be offensive.
At the same time, you have a new platform that uses looking fantastically well, but it is being implemented.
And normally especially with larger clients.
The whole process here that takes some time.
Are you integrating trane will grow and you don't grow overnight I.
I mentioned the timeline we finished converge.
The summer so we fully expect there to scale very nicely.
But we have a lot of upside ahead of us with our existing clients and same store and also with the new ones, but it's going to accelerate as the new platform.
So there is.
There is some time for it to take a moment to me of the of the opportunity and what you see as the combination in a number and that may be a little bit confusing, but these are the two conflicting trends that we see where we stand we fully expect there to be a thing of the past as we finish it next year.
Glenn Thanks for your call.
And your question. Our next question is from the line of David Larsen with <unk>. Your line is live.
Hi, Congratulations on these large enterprise wins shows that convergence, obviously the right strategy.
You've talked about sunsetting, our legacy platform can you describe a little more like what exactly does that mean.
Is that FTE is the bodies and how much money are you going to save.
Once that platform is sunset and then with a decline in R&D costs can you describe the nature of that are you.
Is there an external vendor who is building converge for you and then once you're at call it 60% or 80% of our 100% migrated the vendor kind of disappears.
Thanks very much.
Sure So a few things.
When we talk about.
Legacy platform sunsetting as it goes.
When that happens a lot of good things to happen for the company and keeping clients our own legacy for various reasons.
Not ready to migrate some of the functionality wasn't ready on time when they wanted to because we were building it and things of that nature.
So about half of volume with less now is still they're supporting an older platform.
And not investing Eaton is expensive.
In the uncomfortable for us and for our customers.
So there is no question that once you have a single modern very capable code base that is very high quality.
It's less costly.
And very importantly.
The customer sentiment is much much better.
Converge heavy lifting.
<unk>.
Finish the summer and we are as Bob mentioned, we are re skinning down R&D very significantly.
R&D include the Corps of engineers that are full time employees, you know them well and we did work with quite a few contractors as we build the converge and what you see right now is the reverse of that so as we finished components of converge, we're able to reduce our normalized.
<unk>.
R&D, which is really a potential to save a significant amount of it.
The equity we are going to continue to invest in the platform, but it's the normal proportion.
Our budget and all the extraordinary signs that you've seen in the past few years to really build this transformation on the capsule.
I was wondering if you have anything to add.
Yes, I would say a couple of things.
Ed on one one is.
The amount of <unk>.
Money that we estimate that.
We'll save once were able to sunset those platforms is between five and $10 million.
And some of that is.
Cost to vendors.
And when things like hosting and other.
The other is.
And I would say the other piece of this is we have a lot of resources dedicated right now to migration.
And obviously once were.
At a point, where we can sunset those platforms.
Those resources can be redeployed elsewhere. So.
That's that's another part of.
How to think about.
What happens with.
The sun setting on those platforms and the ending of the migration effort.
Which we're really targeting the end of next year for.
Thank you for your question. Our next question is from the line of Jessica <unk> with Piper Sandler Your line is life.
Hi, guys. Thank you for squeezing me in and congratulations on the on the DHA. So I think we just wanted to understand the kind of positioning into the payer re platforming for 2024.
We had two large strategic players plus the DHA connect so far.
Far in 2023, so I guess at this point that the ammo have complete visibility our complete commitment from payer customers heading into 2024.
Can we think of <unk> 23 is kind of the low point for quarterly subscription revenue.
I'm here with new strategic Hospital cross sells and payer migration kind of layering in from this point. Thanks.
Hi, Jeff good to hear your voice.
We have four strategic we are named one is not.
All of them are fully committed.
To converge.
Disappointing various degrees.
Through our lives one will be live early next year and the other one shortly thereafter.
So that's the headline but by then to take the second part of the question.
Yes, I don't I.
I don't really.
I don't have an answer for you Jeff on.
Does <unk> represent.
The low point.
And subscription revenue it could very well.
I think the.
As we think about.
The rollout here going forward.
The DHA obviously there is there is there is nothing in.
This year for the DHA that.
We will start to see.
Revenues from them.
At go live.
Last year.
And that will build because there are several go lives associated with that contract.
The other the other important thing to note is.
Once we.
But once the government.
The DHA makes the election to go to the full enterprise rollout.
Which we estimate for planning purposes to be.
Towards the end of the year here there is a step function in our financials from.
24 to 25.
That's really important to understand.
And as I think I said earlier.
Step function doesn't bring with it any incremental investments.
The initial deployments here.
Which is cash flow accretive over the.
Just on the initial deployment over the initial.
The 22 month period of performance is.
As all the spending that's.
Loaded in for for that full enterprise deployment.
No.
We.
Well sure were around the low point here of.
Where subscription revenues should be.
But the upside.
<unk> with the growth initiatives that <unk> talked about.
As well as.
Just.
Looking myopically at this.
This BHA contract.
That brings with it the potential for dramatic expansion in subscription revenue.
Thank you for your question. We just have time for one final question that will be from the line of Diana Li with Bank of America. Your Cook Your line is live.
Hi, Hannah Lee I'm on for Alan.
Thanks for taking my question just wanted to know if theres been any updates on how youre thinking about the 400 million profitability targets and if you can frame what youre thinking about in terms of gross margin expectations are any opex assumptions related to those targets.
Yes sure.
Yes.
No real new thinking on it.
We're.
Other than I would say.
Getting there has been meaningfully derisked.
Over with.
With what we've accomplished here over the last quarter.
And that brings with it.
Getting to that.
No area of $400 million.
Over 1000 basis points of.
Gross margin expansion.
Is the lion's share of that growth is really going to be driven by subscription software revenue. So you combine that.
Over 1000 basis points of.
Of improvement.
Probably about 25% declines in operating expenses, driven primarily by declines in R&D spending over that period of time, but also pretty meaningful operating leverage.
In SG&A and that all kind of comes together to deliver a breakeven in and around that 400 level.
Thank you for the question. We are just at time, so I'd like to turn it back over to Dr. Sean Burke for any final comments.
Thank you Aaron and thank you everyone.
Thank you we really appreciate you joining us this evening and wish you a great night.
Thank you and ladies and gentlemen, this does conclude today's conference call. You may now disconnect have a great evening take care.
Yes.
Thank you and ladies and gentlemen, this does.