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

Good afternoon, everyone, and welcome to the 40th Annual William Blair Growth Stock Conference. As you know, this is our first virtual conference. So it's a pleasure to have all of you here, dialed into the webcast today with Teladoc Health. Joining me from the organization is Jason Gorevic, who is the company's Chief Executive Officer. My name is Ryan Daniels. I'm the health care services and HCAT analyst here at William Blair & Company that has the great pleasure of covering Teladoc Health for our firm. So very happy to welcome Jason and all of you to the webcast today. And also want to remind everyone that our complete list of research disclosures and conflicts can be found at our website at williamblair.com. So it's befitting that we're doing a virtual webcast here with a leading virtual health company. And Jason, as you know, this is more of a general Growth Stock Conference from your participation in our live event in the past. So what I might do just to kick this off is ask you to talk a little bit about both your background and then the organization that you've helped grown so successfully over the past few years. And then we can jump into a little bit more about fireside chat and Q&A session, if you will.

Sure. Ryan, thanks again for having us. It is a different way to run a conference. Who knows, maybe this is the way it will go for the future for some time to come. Really happy to be able to do this, and it's such an interesting time in the company's history. Stepping back to my background, I'm a recovering Health Plan Executive. I came out of school in the early '90s, and just like all kids dream of went into health insurance, I went to Oxford Health Plans at a time when the company was actually redefining managed care on the East Coast in a different way that had been done previously. And it was a great time to learn ins and outs of the health care system. I spent about 5 years there, took another -- took the next 5 years out of health care doing technology-oriented start-ups, two-sided marketplace, Internet, e-mail, utilities, and learned about the ins and outs of running digital marketplace, scalable technology, terabytes of data, when that was a lot of data. And then ultimately, went back into health care. I was recruited to go back to Empire BlueCross BlueShield, where I ultimately became the President. And then as we were acquired by WellPoint, which was post the Wellpoint-Anthem merger. They acquired us and I became their Chief Marketing and Product Officer. I spent my next 2.5 years there, rolling out consumer-directed health plans. And trying to consolidate and simplify the product portfolio, which is easier that said than done, and a plan that owned 14 BlueCross BlueShield plans. Left there in 2008 and was deciding between should I go back into a big health plan? Or should I go run a tiny little startup in the telemedicine space? Now I had done versions of telemedicine before. I had run a nurse advice line in the mid-'90s when that really wasn't done. I had been in the technology space of trying to roll out communication devices and technologies, broadly speaking. And I thought that this was the moment for telemedicine. And I guess, I was right, I was just 11 years early. So that was 2009, I started at Teladoc. We were doing about $4 million in revenue. We had about 30 employees, and we were really solely focused on the employer market. And so obviously, it's -- we've come a long way since then. Took the company public in the middle of '15, about 5 years ago. And it's been an interesting ride, and the last 3 months have been just a completely different set of circumstances.

Yes. And that's clearly kind of the topic as you are for a lot of our companies and yours in particular. So maybe it would be helpful, first, just to talk about how your organization operationally has been dealing with the COVID-19 pandemic. And then we can talk a little bit more about kind of the business aspects of it from driving visit growth and the sales pipeline. So how have you internally been dealing with this? And your employees and your workforce to maintain your operational excellence?

Yes. I think about it in terms of our workforce, our technology and then the supply side of the equation, meaning our physician network because we essentially have a two-sided marketplace where there's demand coming from consumers, and we're bringing physicians to bear and then matching them in real time. So starting with our workforce, we have about 50 people in Shanghai. So we got a little bit of an early view into what this was going to look like. As that team went to work from home in really late January and was dealing with conditions that then were sort of replicated in other markets around the world. We were working with the WHO starting at the end of January and the CDC as well. And then it started to move sort of around the world. So we also had about 550, almost 600 people in Barcelona. That entire staff went to work from home, Portugal, the same thing. And so by the time we hit the peak, we had just about all of our 2,400 worldwide employees working from home. I have to say that I'm incredibly impressed with the flexibility of the teams to be able to do that seamlessly, including large call centers of customer service reps, but also developers all around the world using collaboration tools. And we haven't really missed a beat in terms of productivity. I would say our productivity is as good, and in some areas, probably even better than it was before this all started. Now we're in the process of moving back into the offices. So our Shanghai team is back in the office. Our Barcelona team is about 50% back in the office. Our team in Portugal is back in the office. I would say in the U.S., we probably won't go back to the office. I think September 1 is most likely for us. But again, we're incredibly productive, and so there isn't quite the urgency to get back into the office that maybe some others feel. The technology handled the increase in volume just incredibly well. So we saw basically an overnight doubling of our demand and we've always built our technology to scale to multiples. We've always said 10x our peak volumes. And in fact, it performed just magnificently. The teams had to do some adaptation with respect to how we manage our physician network, but the technology itself was proved to be incredibly scalable. And the physician network is really where we felt, you just can't staff for an overnight doubling because otherwise, you just have this latent demand or this latent supply that's unsatisfied. So it took us about 1 week to almost 1.5 weeks to be able to ramp up the physician supply side. But then once we did that, we were able to get back to pre-COVID service levels of connecting people with a doctor really within just a few minutes.

It's great. Thank you for that. And then as we think of COVID-19 and the impact on telehealth, probably more than any area that I look at, it's really brought it into the mainstream that's made it ubiquitous. And it's really I think, advance the environment, and that can have numerous aspects to it. So I'd love to get your view, and this is a question we get from a lot of investors today, of how this is going to change the market over the next 6 to 24 months? And I think we can pursue a bunch of different angles with this. So let me start with the competitive standpoint. Obviously, it's probably brought more funding, more focus on the space. It's brought some big bellwethers like the Microsoft's and Zoom's into the world. So talk a little bit about Teladoc, and I know you've discussed this on your call before, but for the audience, how you're continuing to differentiate yourself in a market that's arguably becoming more competitive given the size and kind of the realization of the TAM that's happened so quickly?

Yes. I appreciate the question. I'd break it down into a few different categories. There are sort of traditional direct competitors. And we're probably 4 to 5x the size of our closest competitor. And we've really, I would say, even through this situation, continue to extend our lead. And it's because we have the broadest set of clinical capabilities. We have the greatest scale by a lot. And we are operationally incredibly sound. And so when you load up volume onto a platform onto the network, it's performed incredibly well. And so we've actually gotten more volume from our existing clients through this as well as competitive takeaways from others who haven't had as good experience with some of our direct competitors. So I would say that's sort of category #1. Category #2 are -- there's been this sort of frenzy among the provider market, as you know, Ryan, right, where physicians saw their volumes just drop off the table, and they had to do something to stand up some technology to be able to connect with their patients. And at the same time, CMS, HHS suspended the enforcement of HIPAA, right? So that sort of opened the doors for a bunch of technologies that are what I would call stop-gap measures, I don't expect those to be long-term solutions for providers. I expect those to be banded that enable them to be able to get something up and running for their patient populations but they're not purpose-built for telemedicine, which our platform was built from the ground up. And when you add in the InTouch Technology, that we expect to close that acquisition at the end of this quarter, we're by far the leader in providing telemedicine technologies to providers. They're built to support physician workflows. They're built to integrate with their electronic medical record systems. They're built to have a great user experience on both the consumer side and the physician side, and they're backed up by our physician network. And so when you put all of that together, there is no other solution in the market that does that, whether it's Microsoft Teams or Epic or Zoom or any of the others. And so, we feel really good about -- as you said, you've got this massive rising tide of the awareness of telemedicine building, the adoption growing and all of that puts a greater emphasis on the sort of core attributes that we bring to bear for our clients.

That's great. Very helpful. What about if we think of the ubiquitous nature of telehealth now, once people use it experience, it see the value, I think they'll probably keep coming back. It's going to drive activations, it's going to drive sign-ups. That's all a positive. Do you see any longer-term pressure on your PMPM fees because you probably have less of a need to market the solution and spend money for organizations to drive that utilization? And do you think, as COVID hopefully normalizes and comps down, we'll still need to drive that marketing message to ensure telehealth utilization at its maximum going forward?

Yes. So it's the data. There's been a lot of research going on during this period as you've done some great research yourself in terms of provider volumes and things like that. The research that we see shows that there has been a dramatic increase in awareness of telemedicine in the market. In fact, the data I have seen just over a matter of a few weeks went from about 50% consumer awareness to 75% consumer awareness, which is almost an unheard of jump in overall awareness. What hasn't moved as fast is what's available to me and what's covered by my benefit plan and my insurer. And so what you see is this overall awareness has increased, but what's the right solution for me has lagged. And we see that as actually, it's a great shift for us because it means we can shift our communications engagement from overall awareness that this is a solution to this is the solution for you based on your benefit plan and the fact that Teladoc is what's covered by your employer, your health plan. And so we still see the need for that. And so we feel very good about the long-term sustainability of our PMPMs. But our messaging gets to be much more targeted, and we actually think that we're going to see increases in the yield there.

That's great. And I guess a follow-up question to that, if I think of the value proposition of telehealth, once people sign up and experience it, you don't have to market that anymore. You can market more of your ancillary services. I'm thinking things like behavioral health as an example, which is also in high demand today. Has that changed the value proposition or the sales pipeline or what clients are requesting from you because they now want to offer that broader offering so that there's going to be also that that been a pull-forward effect of not only amplifying utilization of the core emergent visits on demand, but also your ancillary services as well?

Definitely. So even before this started, we were seeing that multiproduct sales were more than 50% of our sales. So this is no longer a situation where sort of virtual urgent care point solution is sufficient. And so we were already seeing this over the last several quarters. We saw it last year. We saw the same thing in the first quarter. Even as we -- even before we hit this -- the sort of crisis tipping point. Having said that, the volume of visits has actually increased faster among behavioral health, dermatology and some of our other specialties. Than it has for our general medical, which I think really gets to your point. And then the third thing I would say is, we think all of this is a trend that drives toward virtual primary care, which we've been talking about for quite some time. And think about that as a holistic solution, multiple specialties, including nutrition with a national network of registered dietitians, including both coaches and mid-levels as well as physicians includes longitudinal care includes therapists and psychiatrists as necessary. And then specialists, either with virtual care or by connecting with intelligent referrals into the delivery system. And I think that's where our connection and deep integration with the health plans and our health system clients really comes to benefit the consumer by making the right referral the first time when there is in-person care that's needed.

Makes sense. And maybe that leads naturally to a question on the sales line and selling season, you're probably in the heart of it now for back half of the year and into 2021 in particular. So two-fold question. One, discuss how COVID-19 has impacted your sales pipeline? And I think we can look at that as, are you doing more virtual meetings? Has there have been slowdowns at all because people are trying to deal with the virus? Or is it just amplifying it because telehealth is one of the ways to do it? And then anything on the sales cycle, win rate, competition? Just any color you want to provide to the audience because I think that's another important question we often get.

Yes. Certainly no slowdown, quite the contrary. I mean, as we said on our quarterly call, we expect to add 12 million to 13 million new members in just the first half of the year, which is a record for us in terms of first half adds. The pipeline is very robust at this point. I would say it's characterized by a few things: One, global opportunities. So we have a very large pipeline now of large multinational employers who are looking for global solutions as well as distribution partners and global insurance companies. We're looking for global solutions because I think they have -- this situation and the global nature of the pandemic has really put shine to spotlight on the importance of having a solution that's available for all of your population all around the world. The second thing I would say is much more comprehensive solutions to the point that you made before about we're not seeing single products -- RFPs very often. For the most part, we're seeing people interested in the full suite or a large portion of our product portfolio. The third thing is significant increase in demand from provider clients who are looking to implement enterprise-wide virtual care technology solutions. And we're seeing that at Teladoc Health and InTouch Health is seeing that as well. And to that point, we're not only seeing that demand here in the U.S., but we're seeing it internationally as well. So even before I expected us too, we're activating the international distribution system and demand for the InTouch Technology solutions, which I think is probably a year before I expected that to really happen. And then in terms of competitive landscape, we've seen our position only improve over the course of the last 3 months but even before that as well.

That's great. And maybe a natural follow-up, again, to that is, can you speak to the company's investment priorities? I assume some things have changed also because of COVID and what your clients are demanding from you and what you're seeing in the marketplace. So I'm curious if the bring-forward of utilization has require changes to your marketing initiatives and how you drive them changes to technology, a more rapid integration plan with InTouch Health than you initially thought? I don't want to answer the question for you, but I think there's probably a broad number of things that probably changed as you think about your investment priorities. So any color there would be great.

So, Ryan, you hit a bunch of them. The InTouch integration is going really well. We very early signed a commercial agreement that enabled us to go to market together. And the teams have been working on integration planning virtually just like this in large virtual conference rooms. But that progress has gone really well. And I would say it's gone well from a technology perspective, from an organizational perspective and from an operational perspective as well as, of course, commercializing. So you'll see us continue to invest in that area. The provider opportunity is now. And I think we'll look back on the InTouch acquisition as being incredibly timely. We had no way of knowing when we did the acquisition quite how valuable that was going to be. But I was just on a client call before this call and demonstrating it remotely from showing it just like this on video, with nobody actually in their demonstration center, but Joe DeVivo, the CEO, was actually remotely driving the robot around their demonstration center, and it just brings it to life so well. I would say the second area of investment will continue to be in virtual primary care as we bring that to bear. I think the market is ripe for it. I think it was becoming ready for it before this hit. And the amplification of what virtual care can do and the satisfaction levels among both patients and providers of the care that they're getting really demonstrates the opportunity around virtual primary care. And so I think you'll see us continue to invest there. You'll see investment and along -- just to, sort of round that out, along with virtual primary care, we will always continue to look to expand this clinical scope of services that we can offer. Because I think we have the opportunity to go from virtual primary care to virtual multi-specialty care very quickly. And so I think you'll see us continue to invest there. And then to your point about engagement, the engagement needs change, but the opportunity is now to turn users into lifelong users, right? People who have a peaked interest. And we know and we talked about this at our Investor Day, the flywheel works. So when we get people activated, their -- the chances of creating long-term repeat users are very, very high. And it's because of the wide array of clinical services we have, the high member satisfaction and NPS scores that we have and the fact that we really resolved their issues, not just triage them to another site of care. And so the combination of those things make the opportunity now in terms of investing in engagement. And so you'll see that reflected as we continue to invest in that, and you see it in our A&M spend on the income statement. Having said all that, we will continue to march to increasing profitability. That's an important thing for us. We've set out some important benchmarks for what we're going to achieve. And we feel very good about achieving that.

That's great. And a couple of questions here came in from the audience. And I think we addressed this one a little bit earlier, but given the ramp you've seen in growth, what, if any, bottlenecks you need to address to ensure you're able to meet that demand. So I guess we discussed earlier the transitory need to get more physicians on the network. Other than that, any other investments that you need to kind of meet continued demand at these high levels?

Not really. I mean, we said in the first quarter, we spent about $4 million incrementally on physician engagement in order to activate them on the network and handle the demand. We're still seeing slightly higher levels of physician's spend on a sort of unit basis as the demand is elevated, but not nearly at the level that we saw in the first quarter. And we expect that to continue to moderate and get back to normal levels in the back half of this year. From a staffing perspective, we do see greater demand from our clients. And so we've had to bolster our team with respect to client implementations, but those are good problems to have as we continue to onboard large populations. But I don't see big bottlenecks. It's not like they're big technology bottlenecks or staffing bottlenecks or sort of natural capacity constraints.

Right. Okay. Great. And then one other one, and I'll have a few to conclude, from the audience. Can you discuss the network adequacy rules for Medicare Advantage? So MA plans. Is Teladoc able to fulfill all the specialist requirements that the plans have to qualify for the lower 75% threshold? Or can these plans meet the network adequacy requirements by simply having their existing providers adopt a simpler solution, kind of a check a box solution?

Yes. So I think what you're going to see is that the network adequacy rules will be another impetus for us to expand the scope of our specialty offerings for those plans. And what I don't think is going to happen, just those physicians that they already have in their network now being able to offer telemedicine doesn't change the network adequacy calculation. What I think you're going to see is it gives the health plans the opportunity to slightly narrow their networks, which is always a way for them to deliver more efficient care. So they'll narrow their physical networks and bring us with virtual networks to bolster it in order to get to that 75% threshold. So it will give the opportunity for the health plan to more efficiently manage care, and we'll be able to bring our clinical solutions in a virtual manner to enable that.

Great. We're getting more questions from the audience that we're going to be able to fit in. So let me go in order of priority. And I actually had this one as well. So how do we think about longer-term, and you can address this, whether it be 6 months but maybe a year or 2 from now, how do you think the reimbursement from payers will be finalized? Obviously, there's a lot of waivers today that are allowing use of telehealth during the pandemic. There's a lot of individual societies pushing to make those permanent but payers are notoriously difficult to work with. There's a large IDN here in Chicago, where I know the management team. They said they're already having some trouble getting paid and they're worried about the sustainability of telehealth paid visits after COVID-19 dies down. So what's your organizational or lobbying view on the sustainability of telehealth reimbursements?

Yes. So I break it down into the Government programs and the commercial programs. On the Government side, you heard Seema Verma talk about the fact that the genie is out of the bottle on telemedicine reimbursement for Medicare. I don't think we're going back to where we were before. I think there'll be a question about what the levels of reimbursement are. I would not expect reimbursement to be at the same level as an in-person visit. It's more efficient. It's less costly to deliver a virtual visit that -- I actually believe from a health policy perspective, that, that's appropriate, and it should be a lower reimbursement. But I think you can actually make greater margins at a lower reimbursement rate for delivering virtual care. So it should be good for everybody. I think that probably shakes out the same way for the commercial carriers, where they recognize that they should be reimbursing and there's an opportunity to get lower overall cost of care by just sort of dialing in what the right reimbursement level is for that virtual care.

Fair enough. And then maybe a final question here from the audience, and I'll ask one more. How will you look to invest in your chronic care and remote monitoring offering going forward? And how do you expect to incorporate more of a value-based reimbursement model?

Well, I think that very much dovetails with virtual primary care. I think what you're going to see is many different kinds of reimbursement models for virtual primary care, ranging from value-based or performance-based reimbursement to primary care capitation to paying much more sort of transactionally for different activities that we're doing depending on who the payer is. And I think the good news is we have really good analytics to be able to dial in what gross margins do we need. And therefore, depending on what the payment model is, we end up sort of agnostic about it. And I think, again, sort of reinforcing that is the chronic care and remote monitoring that wraps around those services will be a natural fit in order to get to more holistic whole-person care.

Makes a lot of sense. And then final one, I'm going to give you the opportunity to just address anything else, maybe any other major questions you've been getting from investors, any other highlights of the organization we didn't have the opportunity to discuss here in our 30 minutes, 31 minutes now. We're a minute over already. So just I'll turn the ball back in your court to conclude this session with anything that you want to make sure that you leave our audience with today.

Yes. I think the big one, and I said this before, so it's not going to be news to anybody, but I think this moment in time has forever changed the role of virtual care in the health care system. And I think it's easy to think of this as a temporary thing. And while, of course, there's a [ burst ]of increased demand for a finite period of time what you're going to see is that we exit this at a much higher level of consumer engagement and consumer utilization around virtual care, a much higher adoption among physicians, and a much more expansive view of what virtual care can do. And I think we are -- it's gratifying for me, I said 11 years ago, I started at Teladoc. And I think back to where we were. And I came home in the middle of March, and I looked at my wife and I was, like, holy c***. And she said to me, this is what you've been working for the last 11 years. And I think the team has just done an incredible job, and we're never going back to where it was before. There is going to be a new normal, and virtual care is going to be a big part of that.

That's great. Well, I truly congratulate you for all your success, the success of Teladoc and everything you've done that really helped the country during this pandemic. So cheers to you guys, and stay safe. Thank you for your participation today. And although we're not in person, I'll give a virtual fist pump for all the effort. So thank you. I thank everyone who has dialed in, and good luck with the rest of the one-on-one schedule here at the conference in good luck with the remainder of the year as well. So stay safe, and best to you and your family.

Thanks, Ryan, you too. I hope everybody is well.

Thank you. Take care. Thanks so much, everyone.