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

My name is Jess Tassan. I am -- I cover health care tech and distribution at Piper. I'm thrilled to have with me here today Jason Gorevic, CEO of Teladoc; and Mala Murthy, CFO of Teladoc. Thank you both very much for joining.

Thanks for having us.

All right. Great. So we've got 25 minutes for Q&A. I won't direct the questions. You guys can decide where each is best suited. So our overweight thesis on Teladoc is based on your back scale, the integrity of the brand and the potential to drive incremental monetization of each life on the platform. Can you just remind us roughly how many lives touches in 2022 across each product line or maybe in aggregate?

Yes. So I appreciate the basis for the thesis, and I think that's been exactly the basis for our strategy, which is we may have started with virtual urgent care, I got to the company 13-plus years ago. But the vision was always to be a destination for the consumer and to be able to deliver on the promise of whole-person virtual care such that someone -- we can be the front door for someone in the health care system. And so in addition to what you described as the brand, the scale, the depth, I would also add the breadth of our clinical services and really the only ones who can deliver on the promise of whole-person virtual care, which, of course, we accelerated from any consumers looking for more episodic individual services pre-pandemic, and we rapidly surged through to the consumer expectation being -- about being able to get everything for their health care needs, whether it's acute and episodic or chronic or complex, whether it's mental health or physical health. And so where we started many, many years ago was to build a foothold and build a trusted brand and we've added now millions and millions of people to the platform. You want to go through some of the metrics around the scale?

Yes. Jess, I would say we have access to over 80 million people on our platform today. And if you think about the opportunity that presents to us to the point that Jason made around whole person care and the breadth of products and services and solutions we have, there's an incredible opportunity ahead of us to just penetrate deeper into that population base that we have of over 80 million people with all of the products and services that we have, right? Just think about it 1 in 5 of the population has access to our Chronic Care products, something like 1 in 3 have access to our mental health products. The point being that there is tremendous opportunity for growth just by penetrating deeper with the existing products and services that we have. And the last thing I'll say is, if I think about the revenue per member opportunity, the PMPM opportunity, the products we have, such as Primary360, which is our virtual primary care product, the Chronic Care products that we have. These are all highly value accretive from a revenue per member perspective relative to the $2 to $3 of PMPM we have today. So it's the base, the 80 million-plus lives that we can access, combined with the breadth of products and services that we have that to me is the thesis for growth that we have.

So that $2 to $3 on average PMPM across the base, where could that go eventually? And what's kind of the time frame for execution against that opportunity?

So we've modeled the prevalence of the correct conditions that we treat, the prevalence of consumers who don't have a primary care relationship and would therefore be sort of the primary targets for our Primary360 product, the prevalence of mental health care and the need for mental health care in the market. And the sort of upper bound or the potential is about $68 per member per month for -- and again, not only -- that doesn't presume that everyone takes our diabetes program, but only those who would benefit from it, for example. Now when we look at our best clients today, our best clients today are probably in the 30s in terms of dollars per member that we're getting. And therefore, the -- and that's obviously a small subset of that 80 million member population. So to be able to go from sort of the $2 to $3 range up into the $30s with an upper bound of $68 provides us with a tremendous amount of opportunity without even going out and selling new customers, which, of course, we do every day.

Now to be very it's going to take time. It's a journey. That will take time. And I would say the conversations that we are increasingly having with our clients is about how can they be with someone like Teladoc, how can be all in, right, the whole solution, the whole personal care solutions are the kinds of conversations we're increasingly have.

Is the opportunity you just framed independent of BetterHelp? Does it exclude BetterHelp and it refers to enterprises alone?

Yes. That's really our B2B products.

Okay. That's very helpful. So 2022 has been a big investment year for Teladoc as you guys work to execute against the opportunity you just described. Are the investments in sales and marketing, R&D and capitalized software in 2022 onetime or perennial in nature?

Yes, I would say it's both, right? It's all of the above. And the reason I say this is the following, right? If you think about our A&M spend, most of which is in BetterHelp, that is a very traditional direct-to-consumer business. You would -- as we spend A&M, that supports the business growth, the revenue growth of that business. So we would -- we have seen A&M scaling in that business along with revenue growth. If you think about technology and development expense though, Jess, those are investments where we have a very prioritized set of initiatives that we have made our investments in. We have been very clear that T&D is -- we are in a build phase with T&D. And so if you think about the types of initiatives we have invested in, we are -- we talked about 1 app, which is the app that will allow for a unified consumer experience. So that's an example of an investment we have made. Client reporting systems, claims management systems, a unified ERP system, CRM systems, all of these are investments that we have put our T&D again deployed against. And our expectation very much is these are investments that have good ROIs, and they will give us a combination of sustained revenue growth and efficiency in the future and drive leverage. That is absolutely the expectation from our T&D.

So I have a question about the unified app, but just first on the tech and development spend. So would you expect that, that peaks in 2022? Or do the investments kind of continue in 2023?

Yes. I would say we do expect to continue to invest in T&D. I talked about the growth opportunity ahead of us. We would be remiss in not capitalizing on the growth opportunity. Now I'll be [ equally ] here in saying we will balance revenue with profit. As we talked about on the last earnings call, we will continue to invest judiciously in T&D. In fact, we've spent the last several weeks on our annual planning conversations Jason and the leadership team, and it's all been about prioritizing the big bets that we want to make from a T&D perspective for next year and the years ahead.

And our expectation really across all of our cost lines is to get leverage as a percentage of revenue, right? So while it may not come down on an absolute basis, we expect it to decline as a percentage of revenue.

Okay. That's very helpful. So that's the vision of a unified integrated platform with 1 app for enterprise come to fruition in time for calendar year 2023 start?

So we'll be launching our 1 app at the beginning of '23. Just to maybe put a little more color on that. That's the ability for someone to come through a single interface, get access to the entirety of our product portfolio, see all of the clinical metrics from all of the different sources, all of their different conditions and various providers, coaches, nurse practitioners, therapists, all in 1 place, right? And that is really bringing together and realizing the vision of delivering on whole person care. So when we did the acquisition of Livongo, for example, in 2020, that was the vision. We'll bring that to market the beginning of '23 and start to roll that out for our clients. We haven't really been selling based on that because you don't -- we don't believe in really selling the sizzle before the steak is ready. So for us, it's about making sure we deliver on it. We will be migrating clients over onto our 1-app platform. And of course, it will be in market as part of the tool set for our sales teams to sell throughout '23.

So does that -- the utility of that app, is that kind of contingent upon the number of offerings that a particular employer or health plan provides access to? Or do you -- are you able to kind of cater the interface that a consumer sees based on what they've got out access to?

Yes. Think about it as being personalized to exactly what you have access to, right? So you're not going to see services that you don't have access to and you're not going to feel like you're missing out because it's personalized to you.

Okay. And that app is not just applicable for Primary360, that's going to be just enterprise telehealth or virtual medical app?

That's exactly right.

Awesome. So during the first half of the year, Teladoc described the 2023 pipeline that was progressing more slowly than normal. In 3Q, you saw activity accelerate. And as of 3Q, gross bookings were flat year-over-year, while churn was expected to be in line to slightly better. How would you characterize the 2023 benefit selling season in terms of both pricing and appetite?

Yes. So I think what we're seeing is more multiproduct sales, so 75% of our sales this year have been multiproduct sales, bigger deals. So our average deal size is up 50% in '22 versus '21. And those 2 go together, right? When we sell multiproducts, more often, we're getting more revenue per consumer and therefore, we're seeing bigger average deal size. Now part of the slowness or the longer sales cycle is because of the increased complexity, right? When somebody is buying an entire cardiometabolic suite of services from us, which includes diabetes, diabetes prevention for prediabetics, weight management, hypertension products and probably a mental health product along with it in a suite of cardiometabolic services, that's a more complex decision for them to make than if we're just selling diabetes by itself, right? It's a better program. It gives us access to a bigger population. It delivers better clinical outcomes and greater impact on cost. But it is a longer sales cycle. And so I think those are the dynamics going on, bigger average deal size, more components to the sale, but it's elongated in the sales cycle.

Okay. And that's fair. Once the deal is booked, is there any change in the implementation schedule? Or does that kind of proceed as it always has historically?

That tends to proceed just like it has historically.

Okay. Has the momentum you experienced in 3Q persisted or died down 4Q to date? Should 2022 bookings momentum translate to growth in 2023?

So we're still mid-Q4 in terms of selling -- pipelines developing as we expected it to. So no surprises. The revenue will -- and the bookings in '22 will translate to revenue in '23. And so that is sort of the point of us giving you comparables, right? So through Q3, we were roughly flat year-over-year in terms of gross bookings 1 quarter to go, so we'll see how that shakes out. I'm not going to say mid-quarter how we're doing yet.

Okay. That's fair. So the expectation, again, is just that the deployments proceeded as they did in 2022 from...

Well, in 2022, you'll recall that we had 1 large client who delayed from the beginning of the year to the middle of the year in terms of implementation. So that was an anomaly based on that client's ability to roll out their own internal capabilities. I would expect us to return to more of a normal cadence. And the only wildcard is if we close a deal that we haven't closed yet with a midyear start date.

Okay. Are any deals that you might sign for the remainder of the fourth quarter likely to be midyear starts?

Certainly, that's possible.

I'd love to switch to -- switch gears a little bit to BetterHelp. The BetterHelp was run rating at about $1 billion of global revenue as of the third quarter. How should investors think about the growth rate and margin profile of that business for the balance of 2022 and then beyond?

Yes. So we've given you all enough information for you to know we are very pleased with the growth of this BetterHelp business over the past few years. And as we have said before, not only have we seen the growth to be very robust, we are also pleased with the margins of this business. And so Jess, as I think about how we are run rating and exiting, I'll say a couple of things. One is, we have talked about the ad spending primarily around the BetterHelp business, moderating in 4Q, right? We've talked about that extensively. And as a reminder, it's essentially going back to the way life was for BetterHelp pre-Covid, right? The ad spending dynamics in -- as we approach the holiday season are certainly more expensive and challenging and this is a business where we do a lot of optimization around both within the different advertising channels and across the different advertising channels. So it makes sense for us to essentially pull back when we find the ROIs for the ad spend to be suboptimal. And so what we've talked about is to expect A&M to sequentially decline in 4Q very similar to what it used to be. I would say the last 2 years have essentially been an anomaly away from a normal seasonal pattern. And so if you think about what that means for growth, the impact of that will really be more a 1Q of next year rather than a 4Q because we are essentially comping over. It's a more difficult comp.

Okay. That makes sense, and that makes sense. So just kind of more broadly on BetterHelp, it's now, I think, the undisputed leader in DTC mental health care. Is your priority in '23 and '24 kind of shifting from growth to margins?

Yes. I would say that's true for BetterHelp. I would say that's true overall for our business, essentially balancing revenue and profit. And if you think specifically about BetterHelp and how we will do it, the thing about the direct-to-consumer business is, it's something that where you can shift up and down relatively easily. If you think about how we do our ad spending in that, we can choose where on the efficiency curve, we want to be as we balance growth and profit, right? We could decide we want to invest more in ad spend, but that last dollar will be marginally more inefficient relative to the first dollar of ad spend. But we'll get more revenue growth out of that. That's a choice that we can make, right? And that's a choice that we do make very, very dynamically as we think about the ad spend in each of the different ad channels. I mean the 1 -- the scale of our BetterHelp business -- and the benefit of that scale is that we have a diversity of ad channels and the pricing dynamics, the ROI dynamics across the different channels are different. So we will factor all of that as we think about balancing growth and profit.

What is the minimum -- the lowest return on ad spend in BetterHelp that you would be willing to consider as the business matures in 2023?

We will not get into those kinds of specifics. I think we have...

I tried.

I know. I know. Nice try.

I think the other thing to say is that we don't make that decision about where on the efficiency curve we want to be in isolation, right? We make that as a -- that is a function of how are we doing relative to client retention, lifetime value, pricing, right? Because all of those go in together to determine what the overall yield of that ad dollar spent is.

Right. That makes sense. That makes sense. So I would love to just touch on the 2022 guide. At the midpoint, adjusted EBITDA has increased from about $51 million in 3Q to $93 million in 4Q. The ramp, as I'm sure you know, has been the subject of intense debate all year. What are people who are skeptical not understanding about the achievability of that 2022 adjusted EBITDA guide, how do you get there?

Yes, it's what I just said. It is a sequential pullback in ad spend. And we've talked about how that is essentially returning to normal seasonal dynamics. If you actually harken back to 2019 and look at A&M as a percentage of revenue, it declined from 3Q to 4Q in 2019 by something like 650 basis points. So my point being that what we have now talked about a pullback in ad spend is returning to essentially the way it used to be pre-COVID and that is one of the important drivers of the full year adjusted EBITDA that we have guided to, that's actually a large part of what it is. I will also say just because we are pulling back in ad spend does not mean that we are not spending at all, right? Like it's not that we are going dark, far from that. So we continue to have ad spend in the BetterHelp business, and we are essentially looking to the ad prices and deciding where we want to be.

If you listen to podcasts, you know that we haven't gone dark.

Outside of podcasts, where do you continue to spend 4Q despite the seasonal dynamic?

Yes. Listen, it's -- I won't go in to spend by channel. But as we have talked about before, the -- in our BetterHelp business, there is no one particular channel, Jess, that accounts for more than 25% of our overall member acquisitions, right? So it's across paid search, TV, print, products. So it's social media, Facebook, et cetera. So we have a wide diversity of channels, and we continue to optimize within the channel and across the different channels. And as to the point Jason made, it's not formulaic, right? We look at this hourly and daily.

So that's very helpful. In terms of just the BetterHelp advertising and marketing budget, how much of that budget on an annual basis is devoted to kind of big brand level initiatives?

Most of it is not. Most of it is highly targeted performance marketing. We are doing more in larger media sort of mass media outlets. And some of that's just in response to the fact that the price of advertising in those mass media channels has come down. So when you hear about, oh, the price of advertising is coming down, that tends to be about mass media channels because some of the companies who are more impacted by supply chain issues, for example, are pulling back on advertising. Well, that may make TV and print more affordable now, and therefore, it flips it over to being profitable and high enough yield for us that now we're going to lean into that as opposed to historically where that didn't really make sense.

What's interesting is though, if you look at the brand awareness of BetterHelp, it's very, very high. And I think that's a testament to both the scale, right, the scale of BetterHelp vastly outpaces all of its competitors. And the fact that people who have used it, and if you look at the operating metrics around churn, retention, LTV, they continue to be very healthy.

Gives you some degree of confidence in the recovery rate in 1Q and 2Q of next year following the ad pullback. My last question is just Teladoc hasn't issued 2023 guidance, but Mala, you've offered some pretty helpful building blocks. So can you just remind investors what you said about growth rates across the business lines, exiting 2022 and into '23?

Yes. I think about it in essentially 2 parts. So first of all, I'm not going to give specific guidance, obviously. You all will listen to our fourth quarter earnings call, and we will give you more specific guidance. But just color commentary, the way I think about it is for BetterHelp, it comes down to a few different factors. One is, what is consumer sentiment looking like as we exit the year and we go into next year, right? The Fed came out with some commentary today, the market responded like this needs to be a daily feature now. And if the consumer feels, the sentiment is healthy and they want to spend on a discretionary basis, that will be helpful for the BetterHelp business, it's out-of-pocket spend, right? So it's -- so there are macro factors that will impact the business next year. I would say competitive ad spending dynamics continue, right? Because it's -- the ad spending dynamics are really on a microchannel basis. And then the last thing is the balance of growth and profit. That is a choice that we will make. And we'll talk about that as we give guidance. So that's on the BetterHelp side. On the Chronic Care side, I would say, on the B2B side, if you think about Chronic Care, we've talked about the dynamic of the selling season, right? We've talked about our bookings and the size of that. I would say if you think about Chronic Care exiting this year, think of it as high single digits. And so I would expect sort of growth next year to be in that range. Jason, I don't know if you want to add anything to it on the B2B side?

Yes. I think -- and I think the swing factors are -- we saw improvement in our engagement rates meaning number of people who enroll in a Chronic Care program as a percentage of the total recruitable population. So we saw improvement in that this year. If we can -- we will continue to invest in the machine learning engines underneath that, that help us optimize how we engage consumers. And so to the degree that we can see improvement there, that would be upside for us. And then lastly, I'd just highlight Primary360 continues to gain traction. We're still early in the evolution and the sort of life cycle of that product. But we're seeing a lot of interest from both health plans as well as from large employers with Primary360.

Would that be the commentary related to Primary360, is that more related to 2023 revenue impact or 2024?

'24, it will have a bigger revenue impact. This was the first selling season, where we were really in the market selling it.

Okay. Awesome. That was very helpful. Thank you, both. I appreciate you being here. Thank you so much.

Thank you, Jess.

Thank you, Jess.