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

Ladies and gentlemen, thank you for standing by, and welcome to the Teladoc Health Conference call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Patrick Feeley, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, and good afternoon. Today, after the market closed, we issued a press release announcing preliminary first quarter 2020 financial results. These preliminary results are subject to the completion of the company's quarterly financial reporting process and based on present circumstances. This press release is available on the Investor Relations section of the teladochealth.com website. On this call to discuss the preliminary results are Jason Gorevic, our Chief Executive Officer; and Mala Murthy, our Chief Financial Officer. Our prepared remarks will be followed by a brief question-and-answer session. Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating Teladoc Health's performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in the press release and our filings with the SEC, all of which are available on our website. I will now turn the call over to Jason.

Thanks, Patrick, and thank you all for dialing in on short notice. First and foremost, I hope you and your families are staying safe and healthy. The world has changed dramatically since we last spoke with you at our Investor Day on March 5. So we felt it would be prudent to provide an update on the recent business developments as the COVID-19 pandemic has evolved. To underscore the magnitude of this change, in March alone, the world saw COVID-19 cases go from under 100,000 to nearly 1 million. And here in the U.S., an increase from just 13 to 200,000 cases, which has only continued to rise. As you know, we have been in active communication with the CDC and the WHO regarding the novel coronavirus since early January. We developed our internal COVID-19 visit tracker, which is being used to identify and report on trends to the CDC. Our real-time data on persons under investigation is helping to direct resources to the individuals and areas most in need. Over the past several weeks, social distancing and stay-at-home orders have become the new norm, and the physical healthcare delivery system has come under significant strain. Public health officials are encouraging the use of virtual care. Most U.S. health plans have responded by implementing $0 co-pays for virtual visits, and our clients and consumers have increasingly turned to us to meet their healthcare needs during this unprecedented time. Our strategy has always been to meet patients virtually at every front door of the health care system. The investments we have made over the years have left us well positioned to step up and provide relief during this crisis and address the limitations in the physical delivery system. The critical role we play in expanding the capacity and flexibility of the health care system has never been more apparent or more important. We are proud to be of service, not only to our health plan and employer members around the world, but also to our provider partners who are bringing our technology and physician capacity to bear at a time when the health care system is experiencing unprecedented disruption. In fact, over the past few weeks, we have rapidly deployed nearly 30 virtual COVID clinics for our health system clients around the country, so providers can safely treat members in their local communities. As the outbreak of COVID-19 progressed last month, we began to see a surge in demand across our business. During the second week of March, our daily medical visits in the U.S. spiked effectively overnight to approximately 15,000 visits per day, an increase of roughly 50% over just the prior week. That trajectory has continued, and we are currently providing in excess of 20,000 visits per day. Approximately 1 in 10 of these are for people who believe they may have been exposed to COVID, and our upper respiratory related visits have increased. Over 60% of our visits are coming from individuals who have never used virtual care before. The surge in our volume has not been limited to general medical visits but has been broad-based across the full spectrum of care. We have seen a dramatic increase in dermatology visits as offices close and patients do not want to risk infection by going out into the community. Mental health visits have seen similar growth as conditions such as anxiety and depression are amplified by fear, isolation and loneliness during this crisis. While our technology platform is performing exceptionally well, the unprecedented surge in demand for our services over such a short period of time has required us to quickly respond with a number of initiatives to rapidly expand our physician network capacity. These initiatives include changes and enhancements to our provider onboarding process. We are now capable of onboarding large quantities of physicians in a matter of hours or days versus the more typical weeks or months prior to the crisis. Additionally, we have made significant enhancements to our visit queue algorithms, increasing the flexibility and precision in matching supply and demand in real time. This has been particularly important as federal and state regulations evolve on a daily basis. To meet this significant surge in demand, we also temporarily increased physician compensation in certain cases to handle the geographically uneven and unpredictable needs. Given the rapid pace of change, our teams are iterating and learning daily, which has enabled us to become increasingly more efficient in targeting and reducing those investments over the course of the last few weeks. These efforts have significantly expanded the number of active providers while greatly enhancing the productivity of our existing network physicians. We have onboarded thousands of new providers since early March, more than doubling the number of licensed physicians on our network. At a time when patient volumes are down substantially in many physical health care settings, we are pleased to be putting physicians to work who are eager to make an impact by practicing and earning a living during this pandemic. I could not be prouder of the way our team has stepped up during this unprecedented time. We have never innovated faster to respond to the needs of our clients and members. While the initial surge in demand for our services drove an increase in response times beyond what we would consider acceptable under normal circumstances, our actions have had an exceptional impact, and response times have improved dramatically since the early days of the crisis. We are now serving over 20,000 people a day in the U.S., with average response times of less than 15 minutes and median response times less than 10 minutes. Importantly, during the months of March and April, we have seen our net promote scores increase. Our members tell us they are grateful to have access to high-quality care from our physician during this time. These facts give me confidence that the thousands of people who are turning to us now will continue to do so in the future. We believe the investments we are making to expand our physician capacity will enable us to continue to provide high-quality care to both existing members as well as the millions of new members we anticipate onboarding in the weeks and months ahead. We have seen a significant increase in inquiries from both existing clients and new potential clients, who are recognizing the critical role that virtual care plays in the delivery system. Our team members are working tirelessly to respond to new requests for service as fast as possible as we step up to do our part in response to the global pandemic. While it's too early to quantify the long-term impact of the virus, the critical role that we were playing during this crisis will only serve to accelerate the adoption of virtual care. And there is no question in my mind that the role of virtual care has changed forever. As noted in our press release this afternoon, we now anticipate revenue for the first quarter of 2020 to be in the range of $180 million to $181 million versus our prior guidance range of $169 million to $172 million and compared to $129 million in the first quarter of 2019. We anticipate gross profit in the quarter to be in the range of $107.5 to $108.5 million compared to $83.9 million in the first quarter of 2019. Adjusted EBITDA for the first quarter is expected to be in the range of $10 million to $11 million versus our prior guidance range of $9 million to $11 million and compared to $1.2 million in the first quarter of 2019. Total visit volume for the first quarter is expected to have exceeded 1.8 million visits, representing growth of approximately 70% over the first quarter of 2019. As noted in the press release, expected results for the first quarter include additional expenses of approximately $4 million associated with the company's investments in capacity expansion in response to the global outbreak of COVID-19. We anticipate that a greater mix of visit revenue and the investments in capacity expansion made during the first quarter will result in gross margins below our pre-COVID expectations. While the exact trajectory of the pandemic is uncertain, we are confident that the incremental investments made during the quarter have positioned us to respond to the needs of our existing members as well as the new members we expect to onboard in the weeks and months ahead, and we expect visit economics to revert to levels that are similar to the pre-COVID period as we move through the rest of the year. We anticipate providing full financial results for the first quarter and an updated forward outlook on April 29. In concluding my prepared remarks, the recent events have provided an inflection point for the adoption of virtual care. And the role of virtual care in the health care delivery system has never been more apparent. Our culture of adaptability and flexibility have been crucial to meeting the needs of our clients, members and their families, while remaining true to our values of providing our services at the highest quality level. I've never been more proud of the Teladoc Health team and their commitment to living our values. As always, thank you for your continued interest in the Teladoc Health story. As a reminder, we will not be providing any updates to forward guidance on this call. And in the interest of everyone's time, we would like to please limit participants to one question today. And with that, we'll open the call for questions. Operator?

One note before opening for questions. Today's call will conclude at 5:30 p.m. Eastern Standard Time. [Operator Instructions] Your first question comes from the line of Lisa Gill with JPMorgan.

Congratulations, Jason, and thanks to your team for all they're doing in these trying times. I always have to ask a question as it pertains to how do we think about the sales pipeline and the selling season. Is there any way to start to think about that? I mean, I can imagine that the number of inbound calls you're getting are greatly increased. And as we think about telehealth now becoming a more important component about robust health benefit. I think that it's become more prevalent than ever before. Is there -- and you may just tell me, hey, Lisa, ask me that on the 29th, but is there any way to put any numbers around how we think about that at this point?

Yes. Thanks, Lisa, and thanks for your comments. I appreciate that. I won't quantify it. What I will say is that we have literally millions of members in various stages of implementation contracting and the pipeline. We've had both existing clients looking to expand their populations that we serve as well as new clients prospects coming to us as the role of virtual care has become so much more center stage. We're working extremely diligently to onboard members as quickly as possible. Obviously, we do that methodically to try to make sure that we understand both the demand side as well as the supply side. I'm very happy with the fact that we have massively increased the capacity, which enables us to rapidly onboard those members. And again, as I said that, that population that's in the pipeline represents millions of members. When we get to the 29th, we'll give you a membership update as well as a forward outlook on Q2 membership that I think should give you a little bit more color on that.

Your next question comes from the line of Sean Wieland with Piper Sandler.

Jason, you said the role of virtual care has changed forever. And wondering if you can unpack that a little bit? Specifically, what do you think as we look past this crisis, this pandemic as we look out into 2021, 2022, kind of what are the lasting impacts on your business and the industry overall?

Yes. Thanks, Sean. I appreciate it. I would look at it in a few dimensions. One is the consumer awareness and adoption. We're just seeing a tremendous uptick in awareness, as you might imagine, from hearing about virtual care in mainstream media and on all the way to Washington, D.C. And so I think the acceptance adoption and how consumers look at virtual care is significantly different. And I'll give you just maybe a data point behind that. We mentioned that over 60% of our current users are new to virtual care. One of the interesting things is that we're seeing some of the demographics expand, I would say. We're seeing highest growth among younger males, meaning between like 18 to 30, who previously weren't really adopting virtual care very much and now it's become front and center for them. So we're accessing new populations, who we hadn't really accessed before. I think the second dimension is the number of specialties that are being served by virtual care. And I'm getting inquiries literally from every specialty you can imagine, looking to provide care to their patients as well as to access our patient population, again, across the entire spectrum. And the third thing is acceptance by providers who are really embracing, even providers who 6 months ago were sort of turning their heads away from telemedicine, are now looking to us to provide technology platforms such that they can provide care using our technology. And so I think when you look at the compilation of all of those, the -- if it was ever a question of whether virtual care is going to play a leading role in the health care landscape, I think that's been answered.

Your next question comes from the line of Stephanie Davis with SVB Leerink.

Just a quick thought as you are seeing so many of the new specialties that could really embrace telehealth. Has that made you give any consideration to what's in your portfolio right now? And where you could be moving virtual care in the future?

Yes, Stephanie, I think, it expands my or maybe reinforces my conviction of that 3-bubbled Venn diagram that we showed back on March 5, it feels like an eternity ago at our Investor Day, where it's sort of virtual primary care, a virtual multi-specialty practice and virtual center of excellence and where Teladoc Health uniquely is positioned at the intersection of those 3 things. And as I look to virtual multi-specialty care, that includes the full gamut of specialties. And then the last thing, I guess I would say is this entire situation just reinforces my conviction about the acquisition of InTouch Health because just like we're seeing tremendous demand from providers, they also are seeing tremendous demand and the pipeline fill with providers who are interested in their technology solutions to facilitate the ability to deliver care. So -- and that, again, is across all different specialties. So I think it reinforces our vision. And I think it'll continue to push us to be demanding of ourselves as we expand the scope of those services that we offer.

I think, Jason, I would also add, it reinforces the strength that we have in being global. And that is, as we've talked about, one of our significant strengths. So I would add that as well.

Your next question comes from the line of Ryan Daniels with William Blair.

This is Nick Spiekhout in for Ryan. I guess to start on new physicians in the network, how many new physicians have you guys signed up? And if it's been necessary at all to bump up their pay at all? I mean, it might not be given the fact that a lot of PCPs out there who are closing their offices. So I guess if you could just provide a little color there.

Yes. So I'll get -- I'll speak to the volume of physicians. And maybe, Mala, you can speak to the physician compensation. Nick, the -- I think we'll limit ourselves as saying we've added thousands of new physicians to the platform. I'm not going to go into sort of more specific detail of that to some degree, for competitive reasons. But what I feel good about is that we've doubled the volume of patients we're seeing on a daily basis, and we are back to and have been for probably about the last 10 days, pre-COVID service levels. And as I look out into Q2, while there have been some investments made in the physician network, we see that declining significantly as we get back to sort of a normalized state. Mala, you want to speak a little bit more to the investments we've made in the physician network?

Yes, absolutely. So in our prepared remarks, we talked about the $4 million of investment spending we did in the quarter. But really, remember, we saw the surge in March. And if you think about that $4 million, what it was with investment in initiatives to expand the physician capacity rapidly, definitely relative to our expectations at the beginning of the year. And this included the cost of onboarding thousands of new physicians. And in certain instances of temporarily increasing physician compensation in certain cases so that we could meet peak demand. So that's a little bit more color on the investment spending in the quarter.

Your next question comes from the line of Richard Close with Canaccord Genuity.

I appreciate everything you guys are doing. A quick question. As we think as part of the business, the visits included specifically, I assume the surge impacted like profitability on that like book of business. How do you think about that when you have a surge? Is there any -- something you can do retroactively with respect to that? Just curious on that.

Yes. Thanks, Richard. Most of the contracts that are visits included, have mechanisms to increase the prices as utilization increases. The timing of those increases isn't uniform across the full book. So some are sort of automatically done, not exactly immediately, but almost immediately, and others take a quarter to reset to the higher price. But the majority, almost all of them have mechanisms built into them that anticipate increases in utilization. Obviously, they don't all expect it to happen overnight, but they all do have mechanisms in them. I don't know, Mala, if you want to shed more color on that?

No. It's exactly what you said. It would take a few quarters to get the rerating, if you will, but everything else is exactly what Jason said.

Your next question comes from the line of Sean Dodge with RBC Capital.

Jason, you mentioned the shifting demographics of the new users that are being driven to the platform from this. Is there any reason to believe that the propensity of these new users to become repeat users will be any different than you've experienced in the past? I guess, differently, what are your expectations around repeat utilization from all of the new users you've had joined the platform from all this over the last several weeks?

Yes, Sean, thanks for the question. It's obvious a little too soon to tell. What I will say is I'm encouraged by the fact that it's so many people who are new to virtual care. And as you'll recall from our discussion at our Investor Day, that really feeds the flywheel, so to speak. The other thing that I think is encouraging is the number of people coming to us for mental health care, which obviously is a repeat utilization service by its nature, right? That's not a one and done, it's a multiple series of visits and for dermatology, which may be multiple repeat uses and certainly has a tremendous value proposition regardless of whether you're in a pandemic time or not. So because we're seeing such broad-based utilization, and again, I'll just sort of reinforce about 1 in 10 people think that they've been exposed to COVID, which certainly doesn't account for the entire magnitude of the increase that we've seen. So all of that makes me optimistic about repeat utilization, but it's too soon to tell.

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

Okay, great. And let me add my thoughts and thank you for all the work you guys are doing here. Jason, one area that I think investors were excited about getting into 2020 before all this considered on COVID was Medicare Advantage. Any sense on what Medicare Advantage utilization look like in the quarter versus your expectation? You had previously talked about, I think, a 3-year ramp, you thought before you probably have 80% penetration in Medicare Advantage or Medicare in general. Do you think that time line has tightened up given regulations kind of opening up telehealth and also Medicare fee for service?

Yes, Charles, I'm going to refrain from giving deeper color on the visit mix or utilization rates for different populations until we get to the quarter announcement on 29th. I will say that the pipeline that I referenced earlier is a mix of commercial lives as well as government programs. And so we're seeing increased demand sort of across all of the different sort of lines of business within the health plan and commercial markets. And that's also just to sort of reiterate what Mala said, it's happening both domestically as well as internationally, where our international pipeline is also seeing the benefit of the sort of reinforcement of the role of virtual care in markets all around the world.

Your next question comes from the line of George Hill with Deutsche Bank.

Yes. I guess, Jason, one of the things that we've seen during this crisis is what I'll call telehealth kind of by any means necessary with people using FaceTime and Zoom videos. I guess have you seen anything relating to the fragmentation of the business model, the way other providers are engaging with it, that either makes it easier for you to capture share in the future or could make it harder for you to capture share in the future?

Yes. Thanks, George. Look, I applaud the regulatory changes that have reacted to the crisis in front of us. I think some of those regulatory changes, at least I hope, will remain into the future and others likely will not. I think the suspension of HIPAA requirements is unlikely to or I think Adam would tell me to say the lack of enforcement of HIPAA requirements is unlikely to remain into the future once we come out the other side of this. So I don't really see that as a disruption or a competitive threat, rather what I would say is that we're seeing physicians, hospital systems, medical groups, embrace virtual care at a rate that we've never seen before. And given our technology platforms, both between our hospital and health systems business as well as the InTouch business, we are best positioned to benefit from that trend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.