Teladoc Health, Inc. (TDOC) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us. My name is Lisa Gill. I am the JPMorgan Health Care Technology and Distribution analyst. With me this morning is the CEO of Teladoc, Jason Gorevic. Teladoc announced a transaction yesterday to buy a company called InTouch. Not only is Teladoc the largest telehealth provider now but has the largest telehealth platform. To talk more about this is Jason Gorevic. We will take all questions afterwards across the hall in the Georgian Room. Jason?

Thank you, Lisa. Thanks, everybody, for joining us this morning. People are filing in. Hopefully, you can find a seat. I'm really excited to be here. It's a pivotal time in Teladoc Health's history. I'm happy to be able to talk about the company, overall, our strategy. I will give a little bit of insight into our fourth quarter '19 results, at least, on the top line. I'll also talk about the transaction that we recently announced and some of our key metrics, and why I couldn't be more excited about our long-term growth opportunity and potential. Fundamentally, our mission is to transform how people get health care and do that using technology to improve access, create a better experience and better outcomes. And with the addition of InTouch Health, we are by far the leader at every front door or entry point into the health care system. Some of the highlights that hopefully you'll take away by the end of the discussion: We are by far the leader across all channels, all customer channels, seeking virtual care solutions, both where we're delivering the care and where we're enabling it. We've now been public about 4.5 years, strong results, consistent track record of growth and really a compelling financial model. So I'll walk through some of the dimensions of that over the next 20 minutes or so. We're the global leader. So we provide virtual care solutions, both in the U.S. and around the world. About now almost 2,500 employees. InTouch will bring another 400-or-so to the Teladoc Health family. Over 50,000 physicians globally. We provide care in almost 130 countries and over 40 languages. Virtual care is a global need and Teladoc Health provides a global solution. A number of these are key differentiators. I've been asked since I started with the company over 10 years ago, "Well, what's your real differentiator? What's that competitive moat that makes you successful and will keep others out?" And my response is always the same, this is not a single molecule. This is not a single algorithm. This is a complex set of leading capabilities. And when you put all of those capabilities together, it creates market leadership and a sustainable competitive advantage. And I'll talk about some of these as I go through the upcoming slides. In particular, I'm going to show some data around member engagement and how utilization of our platform increases over time. I'll talk a lot about our comprehensive product offering, which is only enhanced by the InTouch Health acquisition. And I'll give some insight into our leadership position across all of our customer channels and distribution channels. But before I do that, I want to highlight the success that we had in the fourth quarter. It was a record quarter for us, and we achieved -- we beat expectations, both internally and externally, on all of the sort of key top line metrics. In particular, on the heels of a strong flu season, and I'll give a little bit of insight into that, our visit volume was above the high end of our guidance and will come in at over 1.2 million visits for the quarter, over 4.1 million virtual care visits for the year. Our revenue guidance for the quarter was $149 million to $153 million in top line revenue for the quarter. We will exceed that and expect to come in between $155 million and $156 million for the quarter and $552 million to $553 million for the year. Again, significantly exceeding the top end of our guidance. When we look at the components of the beat relative to our expectations, about 1/3 of it comes from increased visit revenue, both domestically -- well, specifically domestically, but across the board, our visit volume was better than expected, driving better-than-expected visit revenue. And then the remaining 2/3 comes from subscription revenue, which were really strong across all of our customer channels. In particular, we saw strength in our direct-to-consumer channel and internationally. So we're really pleased with the results and that sets us up extremely well heading into 2020. You can see overall a track record of success and very, very substantial growth over time with greater than 60% CAGRs in both visits and revenue. I talk about success in the fourth quarter, yielding robust momentum and strength looking into 2020. Lisa always asks me infallibly about our selling season. So I thought I'd try to get ahead of that. We saw strong demand across all of our customer channels: domestically, internationally, among health plans, among employers and among hospitals and health systems in addition to our direct-to-consumer channel. That yielded an increase in RFP volume of about 10%. What we also saw was more deals closing that never even went to an RFP. And so that portends very well as Teladoc Health becomes the default solution in the market for buyers regardless of what customer channel you're talking about. Bookings were up about 30% year-over-year. That's a very strong selling season, and it was strong both in expansion within existing clients as well as new logos and bringing new clients on to the Teladoc Health platform. Our average and median deal size was up substantially year-over-year and multiproduct sales represented over half of our bookings for the year. So we've had a long time strategy of expanding the product portfolio, selling new products into the market, adding on products to existing clients and that really is bearing fruit here. I have a few examples of our recent client wins. I think what's notable here is it's across all of our major customer channels. You see the Aetna logo on this. We've been long asked about Aetna and our relationship with them. I'm happy to say that we have expanded and extended our relationship with Aetna on financial terms that we're very happy with, and we continue to look forward into expansion and bigger strategic opportunities in partnership with Aetna as a client. I mentioned the flu season, we're off to a strong start. And as you can see, the fourth quarter was in line with our biggest flu season in recent memory and substantially up year-over-year. You frequently see a moderating of the flu season in the first couple of years, sort of weeks of the year, and that's what we're seeing in weeks 1 and 2 of 2020. Frequently, that continues to pick up as you can see happened in the '18/'19 season. So Teladoc Health is uniquely positioned and has the capacity to be able to help those in need suffering from the flu in areas and at times when the other channels are completely backlogged and running out of capacity. So it's a great example and a great use case of why virtual care really changes the access and the quality of care that's delivered. So as we look to a bigger sort of strategic picture of where we now sit in the health care system, we are now uniquely positioned at the sort of intersection of 3 major trends: the evolving and sort of reimagined primary care system, the big multi-specialty practices that are able to take care of a patient across the full continuum of their health care needs and a center of excellence that brings specialists in 450 different specialties to bear for highly complex conditions that may have multiple comorbidities and our need of expert second opinions. And Teladoc Health is now at the intersection of those, providing all of those in a virtual manner, in a manner that's scalable and meets the consumer on their terms. And we both deliver the care as well as enabling providers in the market to ride on our platform and use our technology to do these things as well. And we're seeing that providers in the market, specifically hospitals and health systems, are embracing virtual care and telemedicine at a rate that is beyond what they have in the past. So the macro trends around value-based reimbursement, around bundled payments, around payer-provider partnerships and convergence of payers and providers, are all pointing to virtualization of more clinical service lines. And as a result, as you can see from a recent JPMorgan Health Care study, telemedicine ranks #2 in areas where hospitals are looking to increase their investment in technology. And so that leads us to the acquisition of InTouch Health. We've known the InTouch Health team for a long time and have had a ton of respect for them. They're really the leader in providing technology solutions for hospitals, for provider-to-provider telemedicine within the 4 walls of the health system and from a hub-to-spoke hospitals. Use cases like stroke care, where time is brain. And if you can get the medication administered in a timely fashion, you can avert either permanent brain damage or even death. Right? And so the ability to use the InTouch platform, which now is being used in over 3,600 care locations, with over -- with approximately 15,000 physicians using their technology, that technology saves lives, improves care and improves the efficiency of using those resources. So you can see some of the numbers about InTouch Health here. InTouch, a private company, so their numbers haven't been disclosed previously. Approximately $80 million in 2019 revenue, very, very strong top line growth, similar gross margins to Teladoc Health in the mid-60s and about 70% of their revenue is recurring revenue, and I'll go into what that looks like. And very importantly, just like Teladoc Health was recently named #1 in customer satisfaction by J.D. Power, InTouch Health has been, for several years now, the #1 telemedicine technology provider into hospitals as rated by KLAS. I said that their revenue is about 70% recurring. As you look down the stack of their revenue, if you look at -- this is 2019 bookings. So what were they selling in 2019? About 30% of it is hardware and devices that help to facilitate that care, whether it's in the emergency department, the ICU, the NICU or even in an ambulance. So about 30% of that revenue or bookings are hardware bookings that may be either sold or leased to the hospital system. The remainder of it comes from software, which is hardware-agnostic and can run on any hardware platform. An operating system or a technology network that is global in nature and allows InTouch Health to manage their devices and the software remotely to make sure that it's performing at the highest clinical level. And then lastly, they have neurologists and psychiatrists who they provide 4 hospital systems on an outsourced basis. So you can see how this is very, very complementary with Teladoc Health because while InTouch Health is providing care to facilitate care in the hospital, Teladoc Health for years has been growing incredibly rapidly by selling hospitals and health systems solutions that enable them to extend outside the hospital, to meet consumers where they are in their home, in their work, in the community. And by putting the 2 together, we cover the full spectrum of clinical acuity. We also cover every entry point and location in the health care system. So it's incredibly complementary with very, very little overlap, both in terms of product and in terms of customer base. So we see tremendous opportunity for cross selling, upselling and virtualizing care across our collective customer bases. And very importantly, as you see on the right side of this slide, we are now available and facilitating telemedicine services and virtual care in every site of care across the entire health care landscape. So this makes us not only the leader in all of our other customer channels, which we have been for many years but also the leader in providing virtual care solutions to hospitals and health systems so at every point in the health care system. We're now able to offer a single solution because more and more our customers and InTouch Health's customers are telling us, we're looking for a single solution to provide virtual care across the entire enterprise. And so that enables us to take InTouch Health's over 40 use -- clinical use cases, along with the dozens of use cases that Teladoc Health supports and expand our solution to create a single solution for hospitals and health systems. It expands our clinical capabilities, all up and down the clinical acuity spectrum, reach across all sites of care and deliver cost efficiencies so that hospitals and health systems can most efficiently use those expensive specialist resources. And then if you look at the competitive landscape with the 2 dimensions being sort of enablement, technology and software that enables providers to deliver care virtually on one end and delivery of care where it's our network who -- of physicians who are actually delivering the care; and then on the other dimension, highly acute to highly chronic conditions, Teladoc Health is uniquely positioned to cover the full spectrum of these delivery mechanisms and clinical conditions. So whereas other point solutions are sort of located in one corner or only compete on one dimension of this spectrum, Teladoc Health is uniquely positioned with scale and across all of the dimensions that the hospitals, health systems, payers and employers as well as the consumer are looking for. And so that brings us to leadership across every channel that we serve. This is very, very important because it's always been our vision to be the leader and be there for the consumer at every entry point into the health care system, and we are definitively, by any measure, the leader in every single one of these channels. For those of you who've been following us for a long time, you've seen this slide or a slight modification or a version of this since before we went public. With our 4 key pillars for our growth strategies of expanding our footprint and our distribution, expanding our clinical services and innovation, accelerating consumer adoption over time and broadening the role that we play in the health care system. And InTouch Health helps us on every single one of these dimensions. As we look at those growth strategies, we continue to execute on every one of them. So one of the things I get asked about a lot is, "Well, what's your most important lever for growth?" And I always say that's kind of like asking me which of my children I love the most. So new members are really important. We have multiple ways to get new members. We have the ability to bring new members on through new clients and new logos, but we also have massive expansion opportunity within our existing customers. Then I'll show you what that looks like in a minute. Increasing utilization, I've always said, that's the report I look at every morning, how many visits did we do yesterday, are we increasing the adoption of virtual care. Expanding the products that we sell. So as I said, we've had a very, very strong selling season in terms of selling multiple products into our clients and multiproduct growth is critical for us. And lastly, expanding our markets and the use cases that we support, and obviously, InTouch Health really helps that. So I mentioned that we have opportunity to grow within our existing customers. I've been asked recently, "Well, Jason, there are 54 million people in America who now have access to the platform, how much can you continue to grow?" So I just want to show you that within those 54 million client -- members or the population that has access to us come from a client set that still has growth opportunity for us of about 75 million people. So without adding a single new logo, I can add another 75 million people just in the U.S. to the platform. And of course, the market opportunity isn't limited to our existing clients, another 190 million or so outside of our existing clients by adding new logos. And I guess, I would just remind you that this is just the U.S. population, not -- doesn't include the international population, where we have a significant competitive advantage and an international footprint. And then in addition to that, we're able to go after the additional population through multiple means. So we're in retail settings, where people can access us through places like CVS and InTouch Health has a relationship with Rite Aid. We also sell on a direct-to-consumer basis and that direct-to-consumer mental health offering, BetterHelp, has been growing extremely rapidly over the last several years. So we have multiple mechanisms to get to those populations. People frequently ask about, "Well, how fast is it growing and is utilization of the platform really increasing over time?" And the best way to show this is by looking at a cohort analysis because sometimes we are victims of our own success, where when we add big populations to the platform, it actually temporarily dampens the utilization as that new population gets onboarded and comes up the utilization curve. So what we've shown here is sort of vintages of clients and how utilization grows over time. And we show this and update this about annually at this conference. We're also frequently asked, "Well, Jason, what does it do for your economics when you add new products into the mix?" So what you can see here is our employer market where we sell directly to employers, not through a health plan, and that's on the left side here, and it represents over 500,000 members who are in clients who bought from us additional products. And so when we sold those new products into that client, our PEPM or per employee per month fees increased by about 30%. In addition, I'm frequently asked, "Well, how does that impact utilization?" And so on the right side here, you see a case study of a population of multimillions of members that added behavioral health and dermatology to our general medical services just at the very, very tail end of 2017. And so you can see how utilization grew when we added in new products to the mix. Because by providing a broader array of services, we become more and more relevant, more important and more top of mind for the consumer. So when we look at all of that and we put that on top of an extremely compelling economic model, that gives us very strong, sustainable, long-term growth that we very publicly and consistently communicated at -- in the 20% to 30% over the long term, and we think InTouch Health and the acquisition of InTouch Health just reinforces that. We have a tremendous amount of visibility. With 85% of our revenue being subscription revenue, that gives me the ability to stand here today saying, I've got 90% plus visibility into my 2020 revenue. Very strong gross margins now up in the high to -- mid-to-high 60s, and we believe that, that stays strong over time and gives us long-term economic leverage as we get OpEx leverage and the company scales. Our acquisition. Our marketing efforts for customer acquisition and engagement continue to get more efficient, posting double-digit improvements year-over-year. And lastly, we've seen 410 basis points of leverage on our adjusted OpEx year-to-date through the end of the third quarter. So the business continues to scale. We hold strong gross margins, and we get leverage on the operating expense line, which yields improving EBITDA and adjusted EBITDA margins. And so hopefully, we've made the case for all of these being differentiated and unique in terms of an investment thesis. And then I would just encourage you to tune in at the end of February, where we'll report fourth quarter '19 and full year results, and we'll also issue 2020 full year guidance, excluding InTouch. We'll be holding an Investor Day on March 5, where we'll give even more insight into the business and the InTouch acquisition. And then when we close the InTouch acquisition, we'll issue updated guidance that includes the InTouch financials. So again, we'll be across the hall in the Georgian Room for Q&A, and appreciate everybody's attendance.