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

All right. We'll get started and appreciate everyone jumping in here for the first session after lunch. And we're very pleased to have with us Teladoc Health. And speaking for the company is Mala Murthy, Chief Financial Officer; and Patrick Feeley, Senior Vice President, Investor Relations. So thank you both for joining us.

Thanks for having us.

Good to be back in person.

Yes, absolutely.

I have to say it's impressive too. All the logos have been changed already to TD. How many days has it been?

4 days.

Yes, that's very impressive.

There was definitely an alternate set.

I can imagine.

And there's a little bit of the bid on the timing, but yes, we're thinking through.

I guess, really to jump right in. 4Q results were actually good relative to your expectations. And I think one of the messages that kind of came out of it was talking about shifting sort of the focus more towards profitability, balancing that with growth. Can you walk us through sort of what kind of went into the decision there and the benefits you see it providing moving forward?

Yes. So we've really been talking about balancing revenue growth with profitability, I would say, back half of last year. Can you all hear me?

Can we turn up the middle mic?

So we've really been talking about it since the back half of last year. And when we talk about sort of revenue growth versus profitability, it's not that we are saying we will focus on profitability to the exclusion of revenue growth. What we are seeing is that we will balance the two. And what went into the considerations is, look, Teladoc Health, as you all know, has been coming off a period of high growth -- hyper growth. Especially, if you look at BetterHelp, one of the segments that we talked about recently has been growing very strongly over the past few years. We are certainly going to manage and balance margin progression across the board, but also in BetterHelp this year, as our guidance reflects, it took a little bit of a backward trajectory in 2022. And we are, as our guidance suggested, looking to expand our margins in BetterHelp. And for us, balance margin expansion with revenue growth also means that we are taking the right steps to rightsize our cost structure relative to our revenue growth outlook. And, Charles, the market has changed. It's a different environment that we are operating in, and we believe that this is the right approach for the environment we're in.

That's helpful. And you just touched on it a little bit on BetterHelp. One of the questions that we're getting is on the margin progression. You touched on it during 3Q and 4Q a little bit. Can you dive into why the BetterHelp business sees such a margin ramp throughout the year?

Yes. I'll start and then Patrick can absolutely add. I'm glad you asked the question because, frankly, we've been getting a ton of questions on that since our earnings call. So it's a good opportunity for us to reinforce the margin progression. So in BetterHelp, what we see this year, similar to what we saw in 2022 is essentially coming back to the normal seasonality that has always been part of this business. If you look at the seasonality of this business pre-2020 pre-COVID, it's essentially reverting back to that type of seasonality dynamic. I would view '20 and '21 as more unusual years to go by. So what is that seasonality? Let's start with Q4. So typically, in Q4 in this business, we essentially throttle back, pull back in our spend. The reason we do that is for a couple of dynamics going on. One, holiday pricing is more expensive. And two, it's the time of the year where consumers are thinking about the holidays, less about getting therapy service and metal health services. So conversion is just a little bit more inefficient at that time. Also, what happens since Q4 is you get the pullback in an ad spend and so you have the help on cost, but the revenue impact of that lag. So that is the combination of the 2 is what gets us to stronger margins very typically in Q4. Pulling back on ad spend, though means as we exit the year, there's fewer member acquisitions and that has an impact on revenue in 1Q, which is why you will find 1Q to be sequentially weaker typically in revenue growth. And also in 1Q, we are ramping up ad spend as we sort of build a book of business up for [indiscernible]. So you take the holiday from that. And so 1Q typically ends up being weaker and larger than revenue growth. So that's a little bit of what happens in a normal year in BetterHelp from a seasonality standpoint. Patrick, can you just wrap?

I think you covered it pretty well. I think the one thing I would add is -- I think the point of confusion is the seasonality really hasn't existed for the past 2 years during the COVID period. Really, in 2020, it didn't exist to any degree. In 2021, it started to come back a little bit. What you're seeing now is a return to the normal seasonality in the BetterHelp business. And maybe the other thing I would add in terms of sort of first half, second half seasonality and progression. In the Integrated Care segment, just remember, you have normal client attrition every year. We have retention in the '90s that has not changed. So you always are losing some small percentage of the book. It's going to be disproportionately waited until January 1. The new clients that are coming in though on GEN-1, it takes time for them to ramp up because especially if you think about the chronic care programs, we're getting paid for enrollment. So you have to go out and drive that enrollment over the course of the year, and that's what leads to sort of ramp up in revenue and margin progression over the course of the year in that segment.

Maybe just one more on BetterHelp. I think this would be the first -- we'll see if it's a recession or not, where we have digital health available for consumers. And I think a lot of questions is, how sticky will this be in an uncertain environment? Maybe how do you feel about how this BetterHelp business will perform in this kind of environment?

Yes. So if I think about how the business is looking now, all the underlying operating metrics are strong, retention is strong. It's really weathered the macro environment over the past several months very well. There was slight pressure on consumers' propensity to spend in the summer of last year as sort of the macro environment started darkening a little bit, but nothing -- since then it's been very stable. And obviously, we have given a range of guidance for that business and the low end of the guidance assumes relative to where we are now that there can be some modest deterioration. Charles, to your question around how should we think about this business over the longer term. Obviously, we aren't going to give longer-term guidance, it wouldn't be prudent for us to do so, just given how dynamic the environment is. I would just say generally at a high level. The kind of guidance we have given for '23 is in the right ZIP code, I would say, of how to think about this business. Remember, this is a business that has grown tremendously in the last years. When I joined Teladoc Health in 2019, BetterHelp was less than $100 million in revenue. So just think about the growth of this business. And it's just not at over $1 billion in revenue now. It's just not going to continue to grow at that type of growth. Plus, as we have talked about balancing margin and profit, we are focusing on margin expansion in this business as well.

So it sounds like -- well, not giving long-term guidance. If we look at the low to mid-teens guidance for this year, it's fair to think that, that's a good kind of proxy -- at least for the next few years that that's an achievable target?

Yes. Again, I would say -- as I said, it's in the right ZIP code. I won't be more specific than that, but it's in the right area.

That's helpful. Maybe moving to Integrated Care, our most recent benefit survey. There's a lot of strong demand for virtual primary care, telehealth, and I think that bodes well for Primary360. And as we think about this product, maybe first, just kind of share with us the traction you're seeing for this year. I know that it's still early days. But is there -- how should we think about contribution within this Integrated Care number coming from Primary360?

Yes. So let me just sort of start with, as we have talked about before, Primary360 is how we think about the future of digital virtual care, right? It's a really good example of how we think about integrated offerings that takes care of the whole person, body and mind. And the reason that we focus on that is because not only is it financially beneficial for us, but equally importantly, it delivers on both clinical outcomes for our members and cost outcomes for our clients. So it is, as I said, how we see the future of digital and virtual care. We are really pleased with the traction that we are seeing in the market. If I can quote some statistics on how this product is resonating in the market, 60% of members haven't seen a PCP in the last 2 years, about 30% would not have seen a PCP, right, without this product. I would say about half of the members use and interact with 2 or more of Teladoc Health Services. People with Chronic Care members with Chronic Care are 4x as likely to engage with this product, and nearly half of the follow-on interactions business are for Chronic Care. The point being, it is a really good example of the power of the integrated offerings that we have. Charles, to your question around the contribution? This launch last year, right? So it's still relatively new in the marketplace. The revenue this year is going to be about triple of what it was last year, albeit off a small base. We expect this to contribute more meaningfully to the Integrated Care segment starting next year.

That's helpful. Then if we think then the core of the Integrated Care offering to certain segments -- the legacy Teladoc business plus the Chronic Care business. You're guiding to mid- to high single digits. Is this -- first of all, right, if we look at historical Livongo growth, historical Teladoc growth much faster, what's changed in the market that this is sort of the growth that you're anticipating? Is it that clients have already picked up provider? Or is it kind of saturation in the market? What are some of the dynamics that are driving this change? And is there opportunities for this growth to accelerate in the future?

Yes. So I'll answer the question in a couple of different ways. Listen, there is no question that if I think about the overall market, it isn't growing at the breakneck speed that was a few years ago, right? COVID pulled a lot of it forward, and it is true that the market is just growing differently than what it was a few years ago. Having said that, I would still remind you all that it is growing mid- to high single digits off of a sizable base of revenue. And I would say more generally as I think about the progress and traction that you're seeing in Chronic Care, I continue to be pleased with the traction that we see in the market, whether it be the fact that if you look at our multi-condition enrollment, we've made a lot of strides in progressing that. When we talked about it on the recent earnings call that is about 30%, that was single digits, about 2, 3 years ago when we did the acquisition. And much more importantly, as I look at how our integrated offerings are actually helping a member from a political outcomes perspective, once again, it really adds weight to the proof points we have around our [indiscernible]. So if I look at our members who are engaged in more than one condition, so let's say someone has engaged in diabetes, but then is incrementally engaged also with [indiscernible] it has access to have potential rate management, they're able to control their diabetes better. They're able to control their A1C levels better. If you look at the mental health, our mental health services are integrated with Chronic Care, and I look at the clinical outcomes for those members. Once again, they are able to manage across diabetes, blood pressure and their weight better. So my point is Chronic Care, along with all of the other products and services we have, the sum total of the 2 is absolutely sort of where we believe the future of this market is. Patrick, would you like to add?

No, I think you can...

This 30% number that you talked about on the call, what is a realistic percentage you think when you guys are internally kind of thinking about because of the benefit across -- the synergistic benefit of having multiple solutions? Is there a number in your mind that is a reasonable target?

Yes. We haven't talked publicly about a target. What I would say, though, is just think again about the fact that if we think about the overall penetration of our Chronic Care services of Primary360 across the base of 80-plus million people we have, there is a tremendous amount of opportunity and runway for us to penetrate further and grow revenue per member with that. So I would say there is enough runway for road ahead of us.

And when you guys talk about sort of -- you finally have a single app that's kind of integrated and sort of single sign-on, it's definitely something that I think the market prefers. I assume it's sort of fully integrated on the back end. Obviously, a lot of which was spent on. Interestingly, though, right in your disclosures, right? You talked about the hospital business though, 20% of revenue, I guess, plus international, which is a smaller piece. Can you talk about this business? Because you bought InTouch, but then you kind of quickly bought Livongo and then that's been a dominated discussion. And what's going on in the hospital part of your business? And where does that get into the overall strategy?

Yes. So as we talked about recently, the hospital business is part of our Integrated Care segment. Listen, we are -- it's relatively as a percentage of our overall book of business, it's about 5% of our revenue. So it's not huge in the context of our overall business. That said, though, there are some really interesting things that are happening in that space. We talked about Connected Care, which allows really for us to put a camera in every patient's room, and that really allows hospitals to extend their nursing staff. We all know about the nursing shortage. So that is really having -- that's having real traction. We are also -- we continue to be really excited with the Microsoft partnership. We've talked in the past few months about the relationships we have now with North Shore which was a competitive displacement. And that is one where the partnership we have with Microsoft really helped. And both us and Microsoft really leaned in into that relationship. So there are some really interesting things that are going on in that space. Hasn't anything...

No, no. I think you covered it.

Before I move on to maybe some of the guidance and outlook, just one more on Integrated Care. Obviously, I think what you're saying makes a lot of sense and the future of where this market is kind of going leaves that direction. And not surprisingly, you're seeing other players, particularly on the payer side, now you're launching a platform, CBS launching a platform and it was on behavioral health. Maybe talk about sort of the competitive dynamics here because some of these are your customers, some of them are not? And how do you differentiate yourself, both working with and competing against?

Yes. All of these are our clients. We continue to have great relationships with them, whether the CBS right now, whether the United, we continue to expand our relationship with them. What we have always said, Charles is, if you think about the assets and capabilities that we have relative to these clients that you've talked about, we've always said we are paragnostic. We partner with payers. We are the kind of engagement and enrollment capabilities that we have, that is very unique, right? And if I think about members engaging with say an insurance companies, et cetera, right? There is a real -- there is a science, there is a consumer experience that we bring to bear that I think is a real advantage. And as I said a minute or so ago, the good thing is we are really agnostic. We work with them. We partner with them. And we will continue to expand our relationships with them.

Okay. So let's touch on the outlook. Obviously, you gave adjusted EBITDA guidance, $275 million to $325 million, certainly better than I think a lot of people were expecting. Maybe talk about your comfort and your ability to reach this target and maybe frame for us some of the larger building blocks that would bridge us from '22 to '23?

Yes. I'd start with revenue growth, right? We have talked about the guidance we gave of 6% to 11% revenue growth. That is about $150 million to $170 million of incremental revenue dollars this year versus last year. You take that along with our high 60s gross margin. So that's one building block. Our gross margin expanded quite nicely in 2022 relative to '21. I would expect to give back a little bit of it this year just because it provided cost increasing, but still with the high 60s gross margin against the revenue growth, that's the first [indiscernible]. Then I would look at the OpEx leverage that we are guiding, right, whether it be -- when we've talked about A&M efficiency for BetterHelp. The fact that we have been investing quite heavily in technology and development over the past couple of years, we have talked about it quite transparently, and that's leveling off and that should give us some leverage. And then we continue to drive G&A leverage, right, whether it be with consolidating back end systems, real estate, et cetera.

And then if you just think about the progression over the course of the year, again, just remember that BetterHelp seasonality, fourth quarter is still likely to be the biggest margin quarter for the BetterHelp business. And then again, on the Integrated Care side, it's a little bit of a tale of 2 halves. The back half of the year, certainly likely to be the stronger margin period than the first half, again, because of that ramp-up in enrollment over the course of the year and how the economics work in that business.

Right. You also did a small headcount reduction. Do you feel like you're rightsized here? Or is this somewhere you could see additional reductions?

Yes. I would say for now, we have right-sized as we wanted to. We've talked about how given the revenue growth outlook that we've provided, [indiscernible] as we balance revenue growth with margin expansion. And it also has allowed us the flexibility to invest it into certain things that we want to continue to invest in. We talked about the integrated, Charles, the reality is in our business, it's not just one thing we're investing in, right? It is a continuous expansion of capabilities that we're investing in. I can site other examples. And so the fact is we will expand our margins and drive revenue growth and invest in the right strategic priorities for the business.

That's helpful. And your current guidance calls for up to 200 basis points of margin improvement, obviously, a down year. In the past, right, the last time you gave long-term guidance, you had kind of talked about 100, 150 points of margin expansion a year. Obviously, you're not giving long-term guidance. But in general, maybe at a high level, how can we -- how should we piece these kind of 2 points together?

Yes. If you think about the components of our margin expansion, Charles, if you look at it on the Integrated Care side, what we have talked about from a guidance perspective is revenue growth of mid- to high-single digits, flat to up 15 bps. That margin expansion is certainly going to be as a revenue ramp for the year. And remember, on the Integrated Care side, second half margins typically will be higher than the first half margins as the revenue ramps, as we enroll people, as utilization grows through the year. On the BetterHelp side, again, as we have talked about, the guidance we have given is a low double mid to mid-teens and we have talked about expanding [indiscernible] of margins, it is really about A&M efficiencies and it is about other cost leverage on the P&L. So I think about A&M efficiencies, we have a very strong team that knows how to do this, has been accurate, is innovative. And certainly, the competitive dynamics that have been signed [indiscernible] have abated. They are stable, I would say. Now obviously, we are still continuing to watch the macros. We'll see how the consumer sentiment is, and therefore, we have the range that we have given, but so far, based on what we are seeing, it is stable.

That's helpful. We have some extra time that someone has a question, otherwise we can keep going, but just wanted to maybe. Right. Going back to BetterHelp. I think one of the -- obviously, the big concerns a couple of years ago and maybe a little bit still today is, to your point, right, high customer acquisition costs. One way to offset that would be longer retention, right? And you've talked about the LTV of numbers. Can you talk about how that's changed over the course of the last couple of years? And I think at one point, Patrick, you even told me the average membership is, what, like 5 months, 4.5 months, something like that around that range. Has that increased? Or did something the mix changed within that? Because when we look at the margins, right, the margins have been improving. Just curious what's kind of driving that?

Yes. I mean I think what we've said is the average duration is somewhere in that 3- to 6-month period. It's hard to -- we don't like to talk about the average because you have sort of long tails of people who have been on -- in therapy for many months and beyond a year, obviously. So we kind of talk about it somewhere in that range of 3 to 6 months. I don't know, Mala, if you want to talk about the second piece of it.

Yes. So I would say last year, certainly, as we talked about the margins going backwards was different, right? There were -- we saw certainly some competitive dynamics last year that as I've talked about, have abated. If I look at the underlying metrics of that business, Charles, as I talked about, whether it be LTV, retention, managing churn, et cetera, they are -- they continue to be very strong. And what is driving that is just this environment of continuous innovation, so that's one. The second is, this is where scale helps, right? The fact that this is a business that is over $1 billion in revenue, scale brings certain benefits, such as: number one, it is a destination of choice to our providers, the therapists, because they know they will have volume. Second is, it allows for better matching of consumers with therapist. And that certainly has an impact on consumer satisfaction [indiscernible] and, therefore, LTV, right, the experience is better. It allows us to test and learn, sort of fail fast innovation -- the scale allows us to do that, including, by the way, testing various advertising channels. We've talked about the fact that this business has been a very strong diversification of that channel. So it's all of these and working across all of these that actually allows us to get to higher LTV and managed assurance.

Yes. I mean I think one of the benefits of scale, as Mala said, is certainly the diversity of advertising channels, right? So we're able to be a significant player across channels. We're not dependent on any single channel or 2 channels. And so that's been a big benefit of scale, and I think something that differentiates BetterHelp versus the competition. But it also allows the scale that, that business is operating at allows a real sort of test and learn strategy in terms of customer acquisition. So you can have a lot of irons in the fire of trying to figure out different strategies and approaches to advertising and marketing when you're operating at that scale. So it's something certainly that's also a differentiator there and something that we've benefited from over the years as that business has sort of scaled up and you can kind of see the margin improvement back if you look back again when Mala first joined with the margin profile of that business, it was very different than where it's been over the last couple of years.

Okay. Last question because we're kind of running up on time here. You alluded to a little bit earlier, right, some of the competitive dynamics in the market. And I think a lot of the commentary was, right, during the COVID period, you had a lot of VC money kind of flood in and invested in a number of businesses, and those were all trying to build up an upscale to justify continued funding. Obviously, then there's a -- have you seen that kind of dry up? And are you starting to see some of these start-ups kind of consolidating or kind of going by the wayside? And is that what's driving the more stability which you're seeing in the pricing?

So I would say, so let me address in 2 ways. First of all, when it comes to the DTC mental health space, certainly, to your point, Charles, if you think back to last summer, there was a lot of [indiscernible]. At the same time, though several of these were seeing some regulatory pressures in other parts of their business, and therefore, we're shifting to a therapy, which is BetterHelp. And so that was what caused the dynamic. I will say I won't speak to bear financial standing, you all can conclude what you want to or what you will, but I will say for BetterHelp, part of being in Teladoc is we are scale, we have a strong balance sheet, it helps to have close to $1 billion of cash. We are free cash flow positive. So in my view, all of these things add to the financial strength, and it will help us regardless of whether it is on the BetterHelp side or whether it is on the Integrated Care side, it allows us to balance revenue growth and margins expansion and continue to invest in the right things for the longer-term success of the company.

Great. I guess we'll end it there. I want to thank you both. Mala, Patrick

Thanks, Charles.

Thanks for joining us.

Thank you.