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

Good morning, everyone. I'm Paul Kwan from Morgan Stanley. Welcome to the Teladoc Health Livongo fireside chat. Before we get started, I do have to read a quick disclaimer. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. Webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to a Morgan Stanley sales representative. And with that, we'll get started. We're very excited to have with us the teams from Teladoc Health and Livongo: Jason Gorevic, CEO; Mala Murthy, CFO; Glen Tullman, Livongo, Chairman -- Executive Chairman and Founder; and Dr. Jenny Schneider, President from Livongo.

Maybe just to start off, Jason, this is a really transformative combination. You're going to basically be redefining virtual care and digital health on a global basis. At the same time, both companies have tremendous momentum, right? Two of the fastest-growing companies we're tracking in the public technology and health care markets. Why now? What do you see in the market, and then we'll go to Glen, that kind of made you think this was the right time to pull this off, Jason?

Yes. Thanks, Paul, and thanks for having us today. We had set out a strategic road map even before we went public on our IPO road show that included chronic care remote patient monitoring because the vision was always to become the destination for the consumer regardless of their clinical needs. But as we went through the time period from March through June, July, we saw the market accelerate by probably 3 or 4 years over the span of just 3 or 4 months, and consumer adoption rapidly accelerated, provider adoption rapidly accelerated and the role of virtual care in the marketplace accelerated. And you're exactly right. Both companies had tremendous momentum at that time even before the pandemic hit, and then it just accelerated through that time. So this was about looking to where the market is now and where it's going and how rapidly it's going to get there. And Glen and I talked about it, and we both had a similar vision for where that was going and how fast it was going to get there. And then it was a question of the complementary nature of the 2 companies coming together at this moment was an opportunity that neither of us could pass up. And then Glen, I don't know if you want to add to that.

I'd only say that I think both companies do a great job of listening to our clients and to our members. And in both cases, there is a very strong push to say each of you are missing something that's important to complete this whole person experience. So for us, they were saying, we were seeing people call us and who had chronic conditions and saying, "I need more complex care. I need to talk to a physician." In some cases, "I love your behavior, your digital health entry to behavioral health, but I'd like more." And I think Jason was hearing some of those requests on the other side. And when you put them together, it just made sense as we sat together, we said, "This is a natural fit." And the ability to put together 2 industry leaders to really create a transformational effect was something that we saw. We could have each become competitors, tried to build it. There are secondary assets out there, but we said this is a once in a -- really once-in-an-industry opportunity. So we took it.

We're getting some questions around the cross-selling synergies. We'll get to that in a few minutes. But it's been a month since the announcement. Curious for the feedback, again, picking up on that thread, Glen, around what you've heard from your stakeholders today. So whether that's members, partners, physicians, employees, what have you been hearing back from the market in terms of the feedback? Maybe we'll start with you, Jason and go to Dr. Schneider.

Yes, it's interesting. I had a discussion that was regularly scheduled just a couple of days after the announcement with a senior executive at one of the largest health plans. He said, "Jason, you're building something that's so big and broad, and it's going to be so important that everybody is going to have to work with you." Because our clients are going to demand it and our competitors are going to have it and in order to be able to compete in the market, we're going to have to have it as well. And it's exactly what Glen said, we listen to our clients. So employers are saying, they are looking for a single destination, a single partner to provide the full breadth of care because there's vendor fatigue out there for all those little point solutions. It's hard. It's not an employer's job or expertise to try to assemble all of those into one seamless experience. And so together, we are going to put that together into a single consumer experience with a single front door that has access to all of the clinical capabilities of the 2 organizations. And that's exactly what our clients and members are looking for.

Jenny, do you want to add on anything you're hearing in the marketplace again over the last month?

Yes. The only -- the other part that I would add to what Jason was sharing. He's right, it's really about experience, really building that holistic experience. So from a member standpoint, Jason shared on his last public earnings call that 60% of their calls were for chronic condition management. We see regularly that our members with chronic conditions have acute needs, maybe ear infection, sore throat. And so it's really delivering on that end-to-end spectrum because you're just a person at the end of the day, and you want the best service, and you want that connected. All of this being built on the data layer is incredible. So that not only drives the end member experience, but it drives it from a physician standpoint, too. So now imagine physicians can get to see people outside of the arena where they're not typically following them, have more information and be able to, whether it's acute episodic or chronic, really detail and deliver the exact recommendations that are most useful to that end member or end patient.

Got it. I think we want to take one step back and just go pre COVID. Maybe we'll start with Glen and go to Jason. For those who may not know both companies as well, talk about what was driving the momentum going into pre-COVID times over the past year or 2? And then again, what's been accelerating throughout but more kind of what was driving before? That would be helpful to understand both sides. Maybe Glen, we can go back to you and then to Jason.

Sure. I'm happy to. Well, both companies, as we kind of referred to, were growing in excess of 100%. So you had 2 really great growth companies that were already -- people were already adopting digital health. And as we talk to clients, as we talk to members, everyone knew where this was going. They just didn't know how fast it would get there and how impactful it would be. And as Jason already mentioned, the pandemic served to accelerate this by -- whether it's 3 to 5 years, whether it's a factor of 10x, whatever metric you want to use, there was a dramatic acceleration. But it was going to happen anyway, and both companies were built to scale. That's really important. Now when the pandemic came along, and I'll reference telehealth, there was only one company of all of them out there that was able to manage -- seamlessly manage the increase in scale, and that was Teladoc. And we took notice of that, that there was one clear leader, both in terms of volume, 10 million visits, but also in terms of the ability to seamlessly scale up. Our clients noticed that as well, and some of them literally were changing over to Teladoc at that very moment. So that ability to scale, paired with knowing where the market was going, it was already going there. This just accelerated it dramatically as it did in many other industries.

Anything you want to add to that, Jason?

Yes. I mean the momentum from both companies was tremendous. I mean we both had great first quarters before when we only had a couple of weeks of impact from the pandemic. Both companies are seeing similar trends with respect to our clients buying multiple clinical services from us. So that's a really strong indicator of the appetite for a broader array of services and sort of the full credit answer. By putting the 2 companies together, it completes that picture for them. And then you saw in the second quarter, from our announcement, 2/3 of our clients buying multi-product solutions from us, again, just sort of speaks to that one partner, one vendor, one consumer experience. And all of that was certainly accelerated. One of the things that I think is probably underappreciated is that Livongo got a little bit of a tailwind from -- in the second quarter from the pandemic, but it was already off the charts as the fastest grower in the market. And it may have gotten a little bit more usage, but the impact on Livongo was actually smaller than the impact on Teladoc. As -- with people unable to go into their doctors' offices, they turn to telehealth for the first time. What the 2 companies share is tremendously high Net Promoter Scores with Net Promoter Scores in the mid-60s. Our clients love us. Our members love us. And together, they're going to get even more from that.

Awesome. Maybe we'll go to Mala and then we'll go to the competitive landscape question after that. But Mala, talk about kind of the outlook you've given. You've kind of got the pre-synergy revenue growth of 40% to 45% for 2021 and a CAGR of 30% to 40% growth over the next 3 years. Can you talk about the confidence there in that outlook and kind of what's driving that, Mala?

Thanks, Paul. What's driving that is a few things. First of all, as Jason and Glen have talked about quite eloquently, there is tremendous and broad momentum across both businesses. If you again look at the second quarter results that we both posted, our revenue growth was in the range of 85%, Livongo's was well over 100%. So you're talking about 2 very high momentum companies from a revenue growth perspective. The second thing I'd say is what's underpinning that revenue growth is high degree of visibility on both sides, right? For those of you who know our business, most of our revenue -- a preponderance of our revenue is subscription revenue, is access revenue, and we have very high visibility around that. As we have talked about in our recent earnings calls, we are seeing tremendous bookings momentum. The amount of bookings we are seeing that are multiple products and services, which fuels revenue growth from an expansion of our PMPM is over 2/3 of our bookings with multiple products. So there are a lot of tailwinds that we are seeing in our -- in both our businesses, very strong visit revenue momentum and most importantly, broad-based momentum. As I always say, we are both businesses that are firing on multiple cylinders. It isn't a concentrated revenue growth story. It is a broad-based momentum story. So the broad-based nature fit plus the visibility that people have is what is underpinning our confidence in the momentum ahead.

We've got a couple of questions in the queue here. Just on the competitive landscape, can you talk about how, again, the combination here is obviously changing the landscape? We had a question around big medical brands, Mayo, Cedars, Cleveland. What competition are they? Maybe, Jason, you can hit that and Glen and Dr. Jenny, you can chime in as well.

Yes. Actually, we provide technology to some of the largest hospital systems, health systems in the country. In fact, I think the last time I looked, we were in 60 of the top 100 hospitals, providing them with technology that enables them to deliver virtual care to their patient populations. We see virtual care as a rising tide. And as the leader in that space, we're going to get an outsized benefit from that. With respect to the overall competitive landscape, I think this redefines it completely. I think we've defined a new category in which we exist almost alone because there's nobody else who has anywhere near the breadth of capabilities who can bring that full credit answer to clients and who also operates in all the compliant channels as the leader, whether it's health plans, employers, direct-to-consumer, domestic, international, hospitals and health systems. We're fortunate we've been deliberate about our strategy at approaching all of those entry points for the consumer to become the leader, and this just accelerates it.

Glen, anything to add there?

Jenny, I'll let you comment first. You're more expert on this than me.

Yes. I think what Jason said is exactly right, like we're in this position really to accelerate. And if you think about the combination of virtual care and remote monitoring, that's where the world, as Jason described, gets really exciting because it's not just delivering care services vis-à-vis a virtual platform. It's actually being able to do it with the data. And that's something that we've seen rapid growth in our own client base around health systems as well for the exact reason that they're understanding that being able to monitor their patients in the outside world does a couple of things. One, it improves overall care, without a doubt, and it also allows everybody to function at the top of their licensure. So you can really focus on it and get the level-5 patients in when they need it. And so it's a win across the ecosystem. And so I do think it's this remote monitoring plus virtual care that is redefining the space altogether.

I'll just add one other point and that is people often throw out different names. You listed a few, other people use big tech names. What about Amazon? What about this or that? And as Jason was saying, in most cases, all those names you're listing are customers of at least one of us already. So Amazon is a customer. They love us in terms of using it for their own employees to provide them better clinical and chronic care. They also -- we're partners in development. So you can go to your Alexa and ask about, give me my Livongo blood pressure, give me my Livongo blood sugar number. And if you walk down the path and we're using them, they're using us, so there's a lot of collaboration. I think the biggest and best tech companies, the biggest and best health systems all understand that you partner with the best providers. You don't have to try to reinvent everything. Health care is a very big space. So you're going to see partnerships. You're going to see sometimes where the underlying -- I mean I've been amazed a number of our clients who I didn't know but are using Teladoc already for one or more services. And it makes it easier for us to contract with them because they already have an existing relationship with Teladoc. We just do an addendum. Our contracting just got easier. So lots of opportunity to work together with all those names you talked about.

That's a great segue to the cross-sell revenue synergies. We've got a bunch of questions there we'll take through in a second. And maybe just to step back for Mala, on the most recently published investor deck, you kind of walked through the targeted revenue synergies. Could you kind of walk through the different buckets there, how that is going to play out over the next 2 to 5 years? And then we'll kind of dig through some of the specific questions the audience has.

Great. Yes. So as we have talked about, we -- from a revenue synergy standpoint, we expect to achieve a run rate of $500 million of revenue synergies by 2025 and $100 million run rate of revenue synergies by 2022. I would also remind you, we have cost synergies contemplated as well of a run rate of $60 million by 2022. When we think about the revenue synergies, the quantified revenue synergies, they really fall into 3 key buckets. Slightly over half of it is coming from cross-sell. The cross-sell synergies essentially are underpinned by the fact that we have fairly limited client overlap, less than 25%. And so that's just an incredible runway for growth from cross-sell to us. The second bucket that we have identified is cross referral. So think of a member, an individual who has both access to both Livongo and Teladoc Health and they are coming for a certain condition. And the provider is clearly able to understand the root cause and help them with the other products. So that is cross referral. And then the third bucket that we have identified, which is approximately 20% of our total synergies, is international. International is something where both teams are tremendously excited about the possibilities. We have a playbook for international. Our sales teams in international are salivating the prospect of getting Livongo that they are able to sell to our clients. And we have large global clients, financial institutions, et cetera. The one other aspect that we are really excited about with the addition of Livongo is the possibility for us approaching national health care systems. So there's a ton of runway for international. The thing that I will also add is, in addition to these quantified opportunities, there are several others that have a lot of promise that we have not really quantified, but we are already together starting to ideate around the possibilities of those. And those include things such as what this could do to our virtual primary care offering, right? We have talked a lot about reimagining virtual care, primary care. So that is -- that -- there are possibilities there and really, all about hospital at home. So again, the -- how can we use our hospital and health system as a great distribution opportunity for Livongo as well? So that sort of encapsulates the thinking that we have around revenue synergies.