Logo
Log in Sign up


← Back to Stock Analysis

Earnings Transcript for UPH - Q3 Fiscal Year 2021

Operator: Good afternoon. And welcome to the UpHealth Third Quarter Earnings Conference Call. I will now turn the call over to Reed Anderson from ICR.
Reed Anderson: Good afternoon and welcome to the UpHealth third quarter earnings conference call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal remarks. As a reminder, this conference is being recorded. On the call today from the company are Ramesh Balakrishnan, Chief Executive Officer and Martin Beck, Chief Financial Officer. During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings including the company's quarterly report on Form 10-Q and various registration statements and Form S-1 and Form S-4 for a summary of the forward-looking statements and the risks, uncertainties and other factors which could cause actual results to differ materially from those forward-looking statements. UpHealth cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise the statements to reflect new circumstances or unanticipated events that occur except as required by law, throughout today's call will refer to pro forma revenues, pro forma gross margins and adjusted EBITDA. These metrics are not determined in accordance with generally accepted accounting principles and therefore are susceptible to varying calculations. Definitions, calculations and reconciliations to the financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of UpHealth's financial results provide useful information regarding certain financial and business trends and the results of operations. Now, I'll turn the call over to Ramesh Balakrishnan, Chief Executive Officer.
Ramesh Balakrishnan: Thank you, Reed. Welcome everyone to UpHealth's third quarter 2021 earnings conference call. Please refer to our websites to review the presentation that captures our discussion today. Our first full quarter as a public company has been a time of tremendous growth and success. As we boldly push the integration of our operations and consistently pursue our transformation to a global leading public digital health company, I am incredibly proud of what our team has achieved during an exceptionally strong third quarter. Our success is attributed directly to the hard work and dedication of all our people and the support of all our investors, clients and partners. So I would also like to thank everyone who has been a part of the UpHealth journey so far with us. Our CFO, Martin Beck will go over financials in more detail. At a high level though, our third quarter results exceeded projections. And we also convincingly demonstrated the clear value and differentiators of the UpHealth model as we come together as one company in our first full reporting quarter as a public company. Some highlights, our revenues exceeded expectations and we report $49.1 million, a 25% increase over last quarter's pro forma revenues. We expanded gross margins from 36% to 40% and 11% improvement from last quarter. We continue to be profitable with adjusted EBITDA of $5 million and increased from $2.3 million last quarter and with our recent capital raise in October, we strengthened our balance sheet, secured the working capital we need for continued and ambitious growth through all of 2022. So we are now focused on continuing to execute on our core mission to create a new architecture for healthcare internationally, with a unique unparalleled offering in the market and bringing value to our shareholders. This is our focus. And we also expand globally and continue to drive meaningful growth and enhanced profitability. So we reiterate our financial projections for 2021 to meet and exceed revenue of $180 million and adjusted EBITDA of $16 million to $20 million before public company expenses. With more than 50% revenue growth expected this year versus last year from $170 million to $180 million, we are confident projecting continued revenue growth of approximately 50%. again next year. Before I turn the call over to Martin, I'd like to touch on three things, our key offerings, our growth strategy, and integration status in that order. At its core, UpHealth provides technology and technology enabled services to manage health. Our approach brings together three highly scalable offerings as part of one comprehensive suite of solutions, Integrated Care Management, Virtual Care Infrastructure, and Service. There is no other provider in the market that delivers these full capabilities in one combined offering, a comprehensive foundation to transform how we deliver care and manage health here in the U.S., in emerging economies, and at global scale. Unlike many digital health companies that are attempting to create alternative delivery systems on the side, we come as partners to managed care organizations, providers and governments in the digital transformation of healthcare. So there are companies that intersect with some of our solutions, but UpHealth is unique in the total scope of what we bring in the breadth and the comprehensiveness of the technology, infrastructure and services we can deploy to create integrated systems of care. The first of our core offerings is our integrated care platform called SyntraNet. The platform is designed to enable our clients to create an integrated care community, and it serves as the technology backbone for UpHealth. SyntraNet integrates information to create 360 degree views of patients and providers, uses advanced analytics to stratify populations better understand what is happening with their health and other needs, and coordinate care teams to manage a wide range of health programs. SyntraNet integrates with our other offerings with our virtual care, infrastructure and services, and this integration will allow us to significantly expand cross selling opportunities. In Q3, we won a significant contract in California to deploy SyntraNet for the largest specialty mental health plan in the state. Some of our clients using SyntraNet already include the County of Alameda, L.A. Care Health Plan, the California Mental Health Services Authority. In Q3, we also completed platform extensions to SyntraNet that support a very ambitious initiative in California called CalAIM to better manage health for individuals with complex medical, behavioral health and social needs. And we grew the population on the platform from around 6.8 million to almost 7.1 million. Our second offering is our Virtual Care Infrastructure. This infrastructure allows clients to extend access to care and care teams with video endpoints, complete exams with connected IoT, diagnostics, and advanced clinical decision support systems. For our domestic business, we package and deploy this infrastructure as our MARTTI platform with video endpoints, that will include remote monitoring, and diagnostics as well. For our international business, we package the infrastructure with our helloLyf platform, with standalone digital clinics, and acute care digital hospitals with substantially expanded capabilities to support full diagnostic, primary and acute care visits including imaging, labs and medications. In Q3, we expanded the U.S. footprint for the HIPAA Compliance MARTTI virtual care platform, and we currently support 168,000 encounters per month over 26,000 video endpoints at over 2,100 health locations in the U.S. We also recorded our largest volume of use of MARTTI with over 7.4 million minutes of consultations. This is compared with 6.1 million minutes in Q2, and 4.6 million in Q3 of 2020. With our domestic personal care infrastructure business, we added contracts with RWJBarnabas, IU Health System and AxessPointe Health with an annual contract value of $5.5 million and a total value over 26 months of $16.5 million. We also opened Spanish interpretation operations in Colombia and expanded operations in Peru to meet increased demand. Internationally, with our virtual care infrastructure, we completed installation of 550 digital clinics in Madhya Pradesh and 250 of them are currently operational. With these clinics, we will eventually serve a population of almost 25 million. We are also very proud to report that we deployed our first hello life fully digital hospital in this quarter in Nagaland, India. This is a truly revolutionary offering. And with it, we extend our virtual care infrastructure to include acute and critical care in inpatient settings. So hello life. The Hello Life infrastructure allows seamless delivery of health, for the home of the patient to hospitalizations, and post-hospitalization. The digital hospital is the first of its kind. It allows physicians to remotely examine patients, not just with consultations, but with much expanded capabilities to view and fuse medications, monitor ventilator flow, conducts physical examinations with connected endoscopes, EKGs other diagnostic devices, complete bedside tests, and prescribe medications remotely. In Q3, we also contracted to install and deploy 260 digital clinics in the Democratic Republic of Congo and are underway with the build out of these. The DRC contract value was $66 million over five years. So I'll tell digital clinics also the ability to log that full patient encounter, complete with physical exams, diagnostic testing, and pharmacy dispensing. And it is a clear example of how the telehealth enabled digital first reproducible novel can improve quality of care very efficiently globally. Our third offering is our services line. The health platforms and infrastructure are designed to onboard a wide range of provider networks and make them available virtually as a point of care. Today, we provide a core set of in-house services and these include first market leading language interpretation with our HIPAA compliant MARTTI platform and medically trained interpreters. Second, medications with a full service, retail and compounding pharmacy licensed in 50 states and DC. In Q3, we introduced new prescriptive direct, a new service to deliver physician recommend supplements that expands our leadership in the management of health with personalized protocols. A third service area for us is behavioral health services, where we are in the process of integrating psychiatry and medical services with a full continuum of mental health treatments capabilities to create a comprehensive care model for behavioral health and this is what we offer the market. In Q3, we expanded contracts to deliver behavioral health services to include community care, life and health, care for first responders and other groups. We also credentialed additional facility to deliver mental health programs for veterans. Turning now to our growth strategy. We continue to advance growth at a significant pace with five key focus areas. First focus, we are continuing to implement contracts across all our solution offerings. Second focus, we will include the communication and collaboration infrastructure provided by MARTTI the virtual care platform with the SyntraNet integrated care platform and the first use case for this will be to bring language services to existing clients who are on the integrated care platform. A third focus is to capitalize on cross selling opportunities. We will combine the integrated care platforms SyntraNet with our expertise to manage health programs, and a for example, use our experience delivering and managing behavioral health services to support health plans manage whole person care programs and other similar initiatives. We will also bring additional value to our existing client base across 2,100 health care facilities, specifically in areas of information integration, deeper analytics and care management with prescriptive guidance. A fourth focus area for growth is to develop strategic partnership opportunities to deliver services, such as language and medication management to other digital health company partners. Near-term focus will be on embedding language services for delivery into the acute care space, and expanding medication management for health plan clients. And final growth focus area as an extension of our business model, we will broaden the virtual care infrastructure to create a very compelling, reproducible model for emerging markets to deliver acute care with fully digital hospital and hybrid clinical teams. As part of the consolidation and building of our global upheld offering, we strengthened the leadership team and added two new members, Mike Rolla joined us from the Livongo side of Teladoc as Chief Revenue Officer. Sarah Arnquist from Beacon Health Options as SVP of Integrated Behavioral Health. We are really delighted to have both of them on the team. Each of them will significantly advance and transform their areas of business focus. In close partnership with our Board of Directors, we also engaged to help advisory industry leaders, Ketchum, global marketing and communication firms to help us bring up health message in a compelling way to the market, as you increase our visibility. Not to implement a comprehensive compliance program across all of our health and national leading management and transformation firm to accelerate our integration and go-to-market initiatives. The goal of these engagements is to continue to enhance the integration and consolidation of our global entities and to maximize the synergy and creation of value across all of our health. So to summarize, then, our third quarter has been exceptionally strong, financially exceeding projections, on revenue, growth and profitability, and continuing the transformation of the company into coherent global public enterprise. I can say confidently, that we are solidly positioned to execute and meet financial targets for the rest of 2021, and drive continuous and profitable growth into 2022. We increased our number of clients, contracts and revenue, we introduce new breakthrough products, and we continued progress on our integration initiatives. We are excited about the future, we are well capitalized to become a leading force in digital health, and have an unmatched combination of technology infrastructure and services that we bring to our clients. With that, I will turn the call over to Martin to go into more details on our financial.
Martin Beck: Thanks very much, Ramesh. We appreciate everyone joining us today. Before I begin my review of our third quarter results, I want to first comment on the presentation as it pertains to the absence of results in comparison period. Recall that we completed the merger with GigCapital2 on June 9, it was only from that date forward that we have consolidated results that we can report on a GAAP basis. Due to timing factors related to the various business combination transactions, encompassing multiple entities, as well as the global scope of our operations, it was not possible to provide consolidated GAAP, or pro forma results that were sufficiently complete for all of the year earlier periods. This is the first full quarter that UpHealth's financial statements include all the businesses combined in the June 9th transaction. Accordingly, we are only able to share results for the three, six and nine month periods ending September 30, 2021 with you today. However, I will provide some additional context where possible to help you better understand our overall performance. I'll start with a review of our results on a GAAP basis. And we'll include pro forma comparisons where appropriate. Revenues for the third quarter of 2021 were $49.1 million, which exceeded expectations. Historically, we reported the company's revenue and gross margins on a business unit basis to provide continuity with historical results. As we have advanced with the integration and alignment of the businesses. We think it's important to show the company as it is now operating, which is along three business lines. First, integrated care management. Second, virtual care infrastructure. And third, services which includes the digital pharmacy and behavioral health business units. Looking at third quarter revenue broken down by segment on a GAAP basis. Virtual care infrastructure was the largest contributor with $19.2 million of revenue, or 39.1% of total revenue. Services which again includes our digital pharmacy and behavioral health businesses had GAAP revenue of $18 million, or 36.6% of the third quarter total. Finally, integrated care management had third quarter revenues of $11.9 million were 24.2% of the total. On a geographic basis, 65% of third quarter revenues came from the United States, 16% from Europe, and 19% from Asia and Africa. Third quarter revenues would not markedly affected by COVID-19 in any of our operating jurisdictions, that we have experienced labor supply issues and our behavioral health business. And it's possible that supply chain issues could impact the rollout of digital infrastructure assets in India. While we are not able to offer a complete year earlier, pro forma revenue figures for comparison, let me provide a little color on the trends we saw within the various segments. To give you a better sense of overall performance. On a pro forma basis, total revenues increased 28% from Q1 to Q2 2021 and increased another 25% from Q2 to Q3 2021. UpHealth year-to-date September 30, 2021 pro forma revenues of $118.8 million, or approximately 38% higher than the combined unaudited pro forma revenues for the same period in 2020. The largest revenue growth in Q3 came in our virtual care infrastructure business line, which saw revenues grow from $12.4 million pro forma in Q2 to $19.2 million in Q3, an increase of 55%. The company's revenue mix continues to shift towards the higher margin, integrated care management, and virtual care infrastructure businesses. Those two business lines increased from 48% of total pro forma 2020 revenues to over 60% of year-to-date Q3 2021 pro forma revenues and to over 63% of third quarter revenues. Gross margin on a GAAP basis was 40% during the quarter, and margins by segment were as follows. Integrated care management 40%, virtual care infrastructure 40%, and services 41%. We view gross margin as a key metric for UpHealth, and it's being useful for comparing our results to our peers. UpHealth's Q3 gross margin up 40% was an increase of nearly 11% from the company's pro forma gross margin of 36% in the second quarter. This improvement stemmed largely from increased volumes in the U.S. telehealth and behavioral health businesses. And as a result of mixed factors and the integrated care management business line factors, which we discussed during last quarter's call. Third quarter net income on a GAAP basis was $32.6 million. This included a $49.9 million reduction from $61.8 million as of June 30 to $11.9 million as of September 30 in the fair value of the derivative liability associated with the convertible notes. As a result of changes in the company's stock price during the quarter. The reduction in the derivative liability was recorded as a gain on fair value of derivative liability, a component of other income in the company's consolidated statements of operations. UpHealth's third quarter adjusted EBITDA was $5 million, which exceeded expectations and which is more than double our Q2 pro forma EBITDA. In addition to residual transaction related expenses, adjustments were made to EBITDA for various lease abandonment expenses. As a reminder, adjusted EBITDA is a non-GAAP measure. We've included a reconciliation of GAAP net earnings to adjusted EBITDA in the press release. I want to spend a few minutes discussing the company's liquidity position. As of September 30 2021, UpHealth had a cash balance of approximately $68 million. The company had short-term debt extras including notes to shareholders and a forward share purchase agreement, which together total approximately $51 million, excluding the current portion of the derivative liability, and a $160 million convertible note. We raised approximately $43 million from the issuance of approximately 26.5 million shares of common stock subsequent to the close of the third quarter. This issuance substantially increased the company's free float and increased the total number of outstanding shares to approximately $144 million. Proceeds of the equity offering will enable UpHealth to satisfy its short-term liabilities and to fund the ongoing working capital and capital expenditure requirements associated with a company's continued growth. Pro forma for the equity offering, the company would have had approximately $111 million of cash on the balance sheet as of September 30, and will retain sufficient liquidity as it continues to invest capital to fund growth and excessive cash flow from operations through at least the second quarter of 2022. We continue to make excellent progress in integrating our operations. Our operating plan costs for the selective integration and expansion of various sales and marketing functions, and for the consolidation of certain business process functions, including financial systems and reporting capabilities. This work is proceeding according to our internal schedules. We've built out a strong and experienced finance and accounting team. We've completed the first phase of our workday implementation at the UpHealth's level, and are in the process of implementing workday at the three business lines. We are currently consolidating employee benefits and our insurance spend across the business lines, and have recently closed a significantly reduced footprint at six locations in the U.S. and Puerto Rico. These cost cutting activities will be supplemented by additional reductions in operating expenses, and we'll be able to provide more details on the scope and magnitude of both our revenue and cost synergies once we complete our 2022 budgeting process. As Ramesh stated, we reiterate our financial projections for 2021 of revenues of a $180 million and adjusted EBITDA of $16 million to $20 million before public company expenses. That concludes our prepared remarks. Operator we're now ready to take questions.
Operator: Thank you. [Operator Instructions] Our first question comes from Mike Latimore of Northland Capital Markets. Mike, your line is open, please go ahead.
Mike Latimore: Good afternoon, and congratulations on the quarter. Great to see another quarter of strong execution there post merger. In the third quarter here, the Virtual Care Infrastructure grew quite a bit sequentially. Can you just provide a little more detail on that because it's more related to the U.S. or international markets and should we think of that as sort of a recurring business, maybe that forms the base for which you can build in the fourth quarter?
Ramesh Balakrishnan: Mike, thank you for participating, and thanks for the question. As you know, the Virtual Care Infrastructure is a high growth area for UpHealth. And what we see in Q3, which we expect to continue is growth, both in the U.S. and the international markets and this is recurring growth, what you saw was a continued expansion of the utilization of the infrastructure in the U.S. with existing clients, expanding the number of minutes, expanding the number of encounters, as well as addition of some really marquee new logos as well. And we anticipate that will continue to expand have an even more so when we bring in some of the synergistic offerings. In the international markets, what you saw in Q3 is the deployment of the large contract in Madhya Pradesh and the expansion into Africa, just the beginning of that with the Democratic Republic of Congo. What we see here in the international market is a recurring model and an expanding model, both with the delivery of the infrastructure and the ongoing recurring services, they support as we service these populations. And of course, we cannot underestimate the absolute tremendous revolutionary nature of the new digital hospital, which is also creating a substantial expansion opportunities for us.
Mike Latimore: Great, and just thinking about the model broadly, is there sort of natural seasonality in the business such that you'd expect more spending or you're in spending like in fourth quarters or is that not natural to this business?
Ramesh Balakrishnan: We don't have any marked similarity Mike in this business, sorry, seasonality, the -- as you know, both these models are driven by the need for care, both in the U.S. and internationally, and more so the move by our customers and clients to these new models where a Virtual Care Infrastructure can bring not only access to care, but also access to extended care teams. So no seasonality substantially in these businesses.
Mike Latimore: Got it, got it. And then just last on the being one of your filings yet, you talked about 100, I think $54 million of I think it was virtual care, the Virtual Infrastructure business, you could see recognize over the next 18 months or so, I guess, can you talk about a little bit more about the catalyst for recognizing that business and visibility and in doing so?
Ramesh Balakrishnan: Thanks for that, Mike. I will ask Martin to respond to the details on that.
Martin Beck: Hi, Mike, how are you?
Mike Latimore: Hi, Martin.
Martin Beck: Thanks for joining us. Yes, as you look at the business, both the Integrated Care Management and the Virtual Care Infrastructure business lines, which together constituted about 63% of Q3 revenues, contractually driven businesses, that gives us very strong visibility into future revenues. We haven't published backlog information at this point. But I can say that from an overall business perspective, we're about where we were, at this time last year in terms of percentage of forward year revenue that's already under contract. And the contract that you're referencing would fall squarely into that bucket. We have the contract and it's about execution on that contract, which we're well underway on.
Mike Latimore: All right, great. Well, congratulations. Good luck for the rest of the year.
Ramesh Balakrishnan: Thank you very much, Mike.
Martin Beck: Thanks, Mike.
Operator: Thank you, Mike. Our next question comes from Mike Wiederhorn of Oppenheimer & Co. Mike, your line is open. Please proceed.
Mike Wiederhorn: Thank you. Congrats on the quarter. A couple of questions, one can you discuss the trajectory of revenues by segment heading into 2022. And also can touch on, kind of how we should be thinking about margins for next year as well. And then overall, kind of you can kind of give us the layout of like the tailwinds and headwinds for next year as well, if we turn the corner here.
Ramesh Balakrishnan: Thanks very much, Mike, for participating into the question. I'm going to turn that over to Martin Beck to answer.
Martin Beck: Hi, Mike, how are you?
Mike Wiederhorn: Good, how are you doing?
Martin Beck: Good, thanks. Yes, so if you look at the revenue mix of the business and think about that, in terms of trajectory going forward, we've seen an increasing mix and growth in the Integrated Care Management and Integrated Care Management, and Virtual Care Infrastructure segments, those segments in 2020 constituted about 48% of total revenues in the third quarter, that constitute 63% of total revenues. So that's where the growth is coming. And we would continue to, we would expect to continue to see that increased rate of growth in those two business lines, those business lines tend to have the higher margins as well. And so we're very happy with the progress in the gross margin, an improvement about 11% from Q2 to Q3 on a pro forma basis, we would expect that, that gross margin would continue to improve as the revenue improves.
Mike Wiederhorn: Okay, great. Also, can you discuss post obviously the capital raise, you kind of positioning in the balance sheet as we think about 2022, that puts and takes into that and how we should be thinking about cash flow, your timing around turning positive on that front as well?
Ramesh Balakrishnan: Sure. Thanks, Mike. I will ask Martin to address that again as well, thanks.
Martin Beck: So if you look at the Q, we had about $68 million worth of cash on the balance sheet as of 9/30. We engaged an equity offering that added about $43 million of cash to the balance sheet. So sort of on a pro forma basis, we would have had approximately $111 million of cash on the balance sheet as of September 30 again pro forma for the equity offering. We will retain sufficient liquidity as we continue to invest to fund growth and excessive cash flow from operations through at least the second quarter of 2022, when we would expect the business to start to generate positive operating cash flow. And Mike, that that assumes the continued growth of the business at the rate that we've outlined, if we are able to grow faster, it provides that we want to do it in a way that generates positive EBITDA. But if the growth rates tend to be a little bit higher than we're currently projecting, we may need a little bit more working capital to fund that. But as it stands right now, we would see the liquidity being sufficient well into the second quarter of 2022.
Mike Wiederhorn: Thanks, I appreciate the color today and congrats again.
Ramesh Balakrishnan: Thank you very much, Mike.
Operator: Thank you, Mike. Our next question comes from Frank Takkinen of Lake Street. Frank, your line is open.
Frank Takkinen: Congrats, Martin, thanks for taking my questions. I wanted to come back to predictability just one more time. I heard your 63% are contractually driven businesses and I heard you kind of reference what percent of next year's revenue is kind of in hand recurring in nature, but maybe just go top down for us what's giving you the confidence to stand by that 50% growth rate next year, and how much of that you feel is contracted and already in place and how much more you need to get in the door to reach or exceed that number next year?
Ramesh Balakrishnan: Frank, thanks for joining. Thanks for the question. I'll start this out and then hand it over to Martin. So if you look at the contracted businesses, virtual care and the integrated care platform, these are multiyear contracts that are based on metrics that expand year-over-year. So if you look at the virtual care platform in the U.S., the expansion comes from an ongoing increase in the minutes of utilization, as well as encounters, and within the existing customers, which are multiyear contracts and the adding of new logos. So based on the pipeline, based on the expansion, based on the uptake and utilization, that's what's behind the confidence and the predictability that we've been projecting. In the international side, what the best way to think about this is once we've deployed these digital clinics in a catchment area, there is an ongoing expanding revenue stream from the services they enable, because we've essentially got a population that is assigned to us and are progressively serving more and more of the population. And that's an ongoing stream. Those are also multi-year contracts. There is a population is there, and the dynamics are such that it's highly predictable and growth oriented. So those in the virtual care infrastructure the dynamics behind the predictability of the numbers of the modeling that we've provided. On the integrative care platform, it's a similar dynamic, multiyear contracts based on populations and there's a two tier here with just the expansion of the population within these integrated care communities we create, but also an expansion of the population that gets enrolled in a number of these programs, which we support and enable which results in an added PMPM within that overall population. So both those elements, the total number of population on the platform and the expansion of initiatives that we're supporting are expanding. And when we look at the further drivers of growth, which are moving the health systems and managed care into the new models of care, that's where we get the confidence in the growth rate that we're projecting.
Frank Takkinen: Perfect, that's really helpful. And then my follow up, I wanted to touch on that second piece of the integrated care growth you spoke to the expansion of population that getting enrolled in these programs. Can you just walk through an example and just try and illustrate for us just how impactful that can be when you transition somebody into one of these programs?
Ramesh Balakrishnan: Sure, thank you, Frank. So I'll give you an example. So if you take the County of Alameda, there is 1.7 million lives in that -- there's about 1.4 platform. Now, there is a number of programs, and there are programs to manage individuals who are homeless, there are programs to manage individuals, who have specific complex conditions, behavioral health conditions, and so on. And the ratio, so if we charge X dollars per member per month for the general population overall, that can increase 10 times when that individual moves into a specific program. So even if we didn't grow the population, as we move the individuals into these programs, the revenue side of it can either have that potential of up to a 10 times additional PMPM. Does that stuff be a question, Frank?
Frank Takkinen: Yes, that's perfect. Very helpful. I'll stop there. Thanks for taking my questions. And congrats on all progress. Thank you.
Ramesh Balakrishnan: Thank you, Frank.
Martin Beck: Thanks, Frank.
Operator: Thank you, Frank. Our next question today comes from Bill Sutherland of The Benchmark Company. Bill, your line is open. Please go ahead.
Bill Sutherland: Thank you, Martin, Ramesh. Good evening. I wanted to look at the services line just for a second at the gross margin. And just a major step up quarter-over-quarter, you could give a little color behind that?
Ramesh Balakrishnan: Thanks, Bill for joining. Thanks for the question. I'll ask Martin to talk to that. Martin.
Martin Beck: Yes. Hi, Bill. We were pleased with the uptick in gross margins at the services line, as we discussed on our last call, we expected some improvement in that gross margin on the heels of stronger volumes, particularly on the U.S. behavioral health business. So we saw that come to fruition and that really drove a good bit of the improvement.
Bill Sutherland: And good. Is that a number that we should think about going forward? And then conversely, I know that there has been a little pressure on integrated cares gross margin, because of the European implementation. Does that go -- is 40 the way to think about at integrated care or is that a higher number as in the past?
Ramesh Balakrishnan: Let me address that Bill. So the best way to think about to integrate care and the margins is that the margins are depressed a little when we're creating these new reference configuration. And once that's in place, they go back to -- so the European initiative represented a new model reference model. We certainly expect those margins to start to go back up as we get into the next phases of that contract. In terms of ongoing expansion of the services margin, Martin, do you want to add to that?
Martin Beck: Yes, certainly. Look, Bill, you saw our overall margin, some gross margin basis, moved from 36 to 40. Part of that is mix, part of it is improvement in the services line. We expect continued strong growth in the two really higher margin segments on a normalized basis. That's integrated care management and virtual care infrastructure. So we think that'll provide a lift to the overall gross margin going forward. And we would hope to keep the services margin in the high 30s, low 40s on a consistent basis going forward.
Bill Sutherland: Okay, so that's the shift that will continue the improvement in gross margin hopefully going forward. One more I was thinking about is the outlook for the international business, I'm sorry, the International Virtual Care business. Can you tell us a little bit about the financial characteristics when you're in a deployment phase versus when you move to operating the clinics? Does that change I guess the margin profile?
Ramesh Balakrishnan: Let me address that Bill. And then I'll ask Martin to add to it. So both phases are high margin businesses for the international virtual care infrastructure and services business. The shift, we target margins in the deployment of the infrastructure itself. And Martin can get into the numbers there. Ongoing, operationally, essentially what happens is that we are shifting to a services recurring services model, which is also generating substantial margins relatively. So the dynamics are a shift from margins on the deployment of the infrastructure to margin on the deployment and provision of ongoing recurring services. That's the structural characteristic in the in the phase. But as I mentioned, both those phases are targeted at good margins for us. Anything you want to add to that? Martin.
Martin Beck: Yes, I think that was exactly right, Ramesh. So on the infrastructure side of things, Bill, we make a margin and we at a very healthy margin, and then we make a healthy margin on the services side. There is obviously a ramp up on the services side as volumes increase, and so that margin on the services side will start irrelatively modest level and ramp up over time. And that's the importance of having number of these different contractual vehicles at different stages in their life going forward.
Bill Sutherland: And then last for me, I know there is a lot of opportunities out there for the virtual model internationally. Can you give us a sense of the opportunity pipeline that you all are working on?
Ramesh Balakrishnan: The sense is, I mean, if you ask the internal team, it's like infinite demand is how we would put it. So it's really a question of how much can be fulfilled. The pipeline can be -- the pipeline is much more massive. So it's not the constraining side of the equation here. It's really how much working capital they would want to deploy to sustain what level of growth. But this is a breakthrough model for the emerging economies, a new model for infrastructure, and how you can deliver not just primary care, but even acute care. And there is just a tremendous interest in leapfrogging legacy and things that we've done in the past to what is really a very exciting 21st century digital first model for these countries who are just in the process of expanding investments in healthcare infrastructure, and healthcare benefits. So the demand is created by both those factors and having a new model is a perfect match for the demand.
Bill Sutherland: All right. Okay. Thank you both for the color. Have a good evening.
Martin Beck: Thanks, Bill.
Ramesh Balakrishnan: Thank you, Bill.
Operator: Thank you, Bill. Our final question comes from Matt Ripperger of Harbert Stoneview. Matt, please go ahead.
Matt Ripperger: Hi, yes. Thanks for taking the question. Just a couple questions. On the CalAIM relationship. Do you want to -- do you mind giving some frameworks in terms of how you're working with them now? How big the membership population is and how you're contracting with that Medicaid program in innovative California?
Ramesh Balakrishnan: Matt, thanks for joining us. And thanks for the question. So as you know, CalAIM is a program that kicks in next year. It builds upon programs that have been deployed up to down with the builds upon whole person care, it builds upon health homes. And the purpose of the program is to demonstrate a new way to manage the Medicaid population that is at the heart of the challenge with providing healthcare to that population. Its individuals of complex medical conditions, behavioral health and social factors affecting their health. So what we are focused on is expanding our beachhead in the largest plan participating in CalAIM, which is added care health plan, as well as working with some of their provider networks. And what we are initially focused on is the expansion within our largest Medicaid plan in the state actually in the country, and expanding from there into the provider network. And an additional plans that are part of that whole initiatives.
Matt Ripperger: Got it. And just to drill down a little further, if I could. Remind me how many members are in the CalAIM program, and how many members potentially could you be contracted with through the plans that you work with in '22?
Ramesh Balakrishnan: So the entire California Medicaid population, which is in I think it's 12 million or 13 million is in the CalAIM program. Currently, we are serving somewhere in the 2.5 million to 3 million members in that program. And we expect to expand that to account for close to 50% of the population under that program as it rolls out.
Matt Ripperger: Got it. So call it 6 million to 7 million as it rolls out, and you will be contracting with them on a negotiated PMPM basis?
Ramesh Balakrishnan: That is correct.
Matt Ripperger: And will you be taking risks under those contracts?
Ramesh Balakrishnan: We will not be taking risk under those contracts. But as at least not yet. We are looking at arrangements as we add services to help manage health programs at models where we could participate in certain incentives attached to outcomes and other metrics that we can help move.
Matt Ripperger: Got it. And is there a preliminary PMPM we could assume for that 6 million to 7 million lives.
Ramesh Balakrishnan: That's part of our pricing model. So we don't disclose that. There is another growth element Matt, which is related to the overall expansion of Medicaid itself within the state, as you know, and that's across the whole country. So the population under Medicaid is also growing.
Matt Ripperger: Got it. Okay. Great. Thank you. And then a second question I had is related to the direct contracting program with Medicare. What are your overall views of that program? And are there ways that you can participate in that through partnering with provider groups or taking risk your health plans in the DCE area?
Ramesh Balakrishnan: Yes, absolutely. So one of the reasons that we use the word managed care organization as our target customer is that there are many flavors of that kind of organization. Traditional health plans, providers in various risk based and delegated arrangements. But also entities like the DCE direct contracting entity as well as flavors of accountable care organizations. These are all target customers for us. And exactly the set of capabilities that would bring to a health plan, we would bring to the DCE as well, both in terms of technology and infrastructure, and as we outlined value-added services to help them manage programs and metrics that they need to hit as part of that DCE program.
Matt Ripperger: Got it. But again, this would be a case where a DCE would then share some of the PMPM with you on a non-risk basis, as you expand the membership base that you're sort of indirectly contracting with?
Ramesh Balakrishnan: That is correct.
Matt Ripperger: Got it. And that would kick in '22 as well?
Ramesh Balakrishnan: We haven't explicitly modeled an expansion into DCE's math, but it's one of the targets in the managed care expansion in '22 that that we are modeling.
Matt Ripperger: Got it. So that would be incremental to the 50% revenue growth that you spoke to for '22 preliminarily?
Ramesh Balakrishnan: That is correct.
Matt Ripperger: Okay. And just a last question I had is, I know you guys have invested materially in building out this platform, this IT in digital platform, I think in the range of 100 million over a decade or so. Correct me if I'm wrong, but is there any other material investment that you need to make to be competitive or to have the most comprehensive solution going to market in '22?
Ramesh Balakrishnan: We have made substantial investments in dollars. But also, we have some very innovative breakthroughs that we've made in how the platform is designed built around this concept of an integrated care community. The major elements of investments we need to make on the platform are behind us. The core functions are in place. But we do have as with technology, ongoing enhancements, ongoing build out of reference models, rules, protocols, guidelines, assessments, that we will continue to keep ahead of technology competitors.
Matt Ripperger: Got it. A bit more along the maintenance CapEx type of investment?
Ramesh Balakrishnan: Some of it, yes, I would say the ongoing continuous improvement of the platform.
Matt Ripperger: Got it. Okay. Thank you very much.
Ramesh Balakrishnan: Thank you, Matt.
Martin Beck: Thanks Matt.
Operator: Thank you, Matt. This concludes today's Q&A session. I would like to hand you back to Ramesh for any closing remarks.
Ramesh Balakrishnan: Thank you very much. So we want to thank everybody for joining us today. And just said again that we are very, very proud of what we have been able to do in Q3 with not just the financial growth, but the growth in customers, contracts, new products that we have introduced. We are poised with capital for growth of a very optimistic and confident in being able to create a leading digital health company in the market. So thank you all for participating today.
Operator: This concludes the UpHealth's third quarter earnings conference call. Thank you all for joining. We hope you have a great rest of your day. You may now disconnect your lines.