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

So our next presentation is going to be Teladoc. Thank you for coming to Canaccord Genuity's Growth Conference. I'm Richard Close, covering digital and tech-enabled health. And so pleased to have Teladoc back at the conference this year and for driving up Jason, this is twice now. And I think the last time we were in person, you had to drive up because of weather. So greatly appreciate that. Definitely been a couple of eventful years for the company with COVID, post-COVID, Livongo and some of the pains on that front. But really, to be clear, the company is the leader in digital health. So looking forward to our conversation today. So Jason Gorevic, CEO; and Mala Murthy, CFO, to have a conversation with.

So maybe appropriate just to start off, with the second quarter you reported a couple of weeks ago, obviously, solid results, exceeding expectations, raising guidance or the lower end. So -- and a good follow-through on the stock. So maybe what were, Jason, the bigger takeaways that you have from the quarter and then, Mala, on the financial side, after Jason?

Yes. I think -- so first, thanks for having us. We appreciate it. We're happy to be here. The first half of the year, I think, was another affirmation of the opportunity and the strength of the virtual care market and buyers' receptivity to our whole-person solution and the breadth of our offering. We did -- we fielded a study in the second quarter of large employers, and 3 out of 4 large employers said that they were planning to increase their investment in virtual care over the course of the next 3 years. Half said that they were very interested in a single whole-person solution as they consolidate vendors and look for more holistic solutions as opposed to individual point solutions, and half said that they were interested in health plans that incentivized virtual care as really the first stop in the health care system for their employees. So as I look out into the implications of our strength in the first half, the results that we've put up as well as the feedback from our clients, in fact, we just had about 250 of them here in Boston for our annual forum, it's really clear that our whole-person virtual care solution is not just taking hold but emerging as the right solution because I think people understand that if you disconnect chronic care, acute care, mental health, physical health into its fragmented pieces, you just don't get the same as the integrated solution and the power that's greater than the sum of the parts.

And I'd say, from a financial perspective, we've had a strong start to the year. If I look back to our performance over the past couple of quarters, I would say we have met or beaten the expectations that we have set. If I look to the second quarter alone, as you know, 10% year-over-year revenue growth. The adjusted EBITDA was above the high end of the expectations that we had set at $72 million. So those are -- that's solid performance for the quarter. If I peel back and look at the segment performance between Integrated Care and BetterHelp, clearly, the highlight for the quarter from a performance standpoint was Integrated Care, and the performance in Integrated Care segment was driven by strong chronic care enrollment performance. Certainly, that was at the high end of our expectations, and that has been a highlight for the quarter. On the BetterHelp side, I would say we are seeing relative stability relative to the expectations we had set and we had started off the year with. Acquisition costs are in line with our expectations, and that has allowed us to deliver on strong margin progression for the quarter on a year-over-year basis. And overall, I would say, we have set out to balance top line growth with margin performance, and I'm really pleased to say that the progress we are making in efficiency as well as that balance that we are delivering is coming through in our results. And if you look at the expectations we have set for the year, we are on track to deliver between 150 to 200 basis points of margin expansion for the year.

Good. We'll dive into some of that in more detail. Jason, I have to ask a question because I always get inundated, either the inbox or by phone, every time Amazon announces something. So I feel obligated to ask you about the Amazon Clinic. The stock on your second quarter earnings rocketed higher and now has since given a lot of that back, maybe unwarranted, but I'll let you talk about Amazon Clinic and the impact to Teladoc or other virtual care providers.

We've been public since 2015. And I can't count anymore the number of times that there's been an announcement about either Amazon or Google or Apple getting into health care and how that was going to be the beginning of our demise. And every time, that has proven not to be even close to the case. I think this is another example of that. If you think about Amazon, in particular, they've had a number of fits and starts in health care. They announced Amazon Care, that was going to go after the B2B market, going after employers. Last year, they announced that they were shutting that down. It never became anything of a threat, except for headline risk, quite frankly. In this latest iteration, it's more of a marketplace that's designed to front-end their Amazon Pharmacy. They opened it up to third parties to provide diagnoses and prescriptions for basic everyday things like hair loss and ED and other things that they can fulfill through their pharmacy. It's entirely on a direct-to-consumer basis. We were offered the opportunity to participate. We passed. We didn't think that it was strategically in line with our priorities. And so we opted out, we said, thanks very much. The -- we have a good relationship with Amazon. I don't see this as competitive at all. I will say we don't take Amazon for granted. We are well aware of their depth of resources and things like that. But we've always said that the barriers to entry in virtual care are relatively low, but the barriers to success and scale are really high. And I would say there are others who are more in the direct-to-consumer retail space who are in the business of fulfilling the medications themselves, where this may be more competitive. That's just not our business model. And we've always said very clearly, we're there to serve our consumers and we get to our consumers through their plan sponsors, right, whether that's their employers or their health plans. And therefore, we are in the business of delivering clinically sound better outcomes for more complex conditions in a way that drives down cost and makes the system more efficient on behalf of those clients who are sponsoring their access to us.

Okay. Let me check that box. Moving on, can we talk a little bit about GLP-1 drugs, you've -- you come up quite a bit on the last several conference calls, and just what you're doing around that? There's a lot of moving parts, and some studies came out here recently on -- yesterday or today on the benefits of the drug. So just curious, your thoughts and the discussions you're having with your customers?

Yes. It's a very hot topic for our clients. Both health plans and employers are really concerned about the cost. They're acknowledging that there are significant potential health benefits. Certainly, they're effective at weight management. I think there's a real challenge about having GLPs be the only solution for weight management. And we really believe that it has to be accompanied by behavior change, including change in diet, change in really a whole nutritional program, change in activity and exercise. In many cases, it's beneficial to have some sort of mental health care along with it to ensure that people have the right motivation to engage in those other lifestyle and behavioral changes. Otherwise, it can become a lifelong commitment, and that's a very expensive proposition for those employers and health plans who are sponsoring the cost of that. So they are very concerned about it. We hear it as one of the top few concerns that are coming from our clients. And that's why we rolled out our provider-based care for weight management and diabetes prevention. That's a continuation of our strategies of rolling out the provider capability that we have for oversight and medication, either prescription, titration or ultimately, in the event that it's possible, to wean people off those medications and really rely more on lifestyle changes. So we started doing that in mental health care. We then moved to diabetes and hypertension and now to diabetes prevention and weight management. So in that offering, there's a physician who's available to augment our diabetes prevention and weight management programs. They work in concert with the rest of our digital capabilities. And they do have the opportunity and the ability to prescribe medications, GLP-1s in this case. And what we hear from our clients is they really are looking for something that is more of a holistic solution that is going to engage all of the components, digital and professional, to be able to take advantage of the medications, but also do it in a way that's judicious and manages the cost of those meds, ideally with the opportunity to change lifestyle such that once someone achieves the optimal weight that then they can wean off the medications and not be on them for the rest of their lives.

If you don't mind me asking, how does -- with the provider-based programs that you mentioned, when does the doctor come in -- are the members enrolled in the chronic care program? And then -- like how does the doctor get involved? I just want to know that process.

Yes. So there are a number of ways that the physician can get involved. They can be engaged by the consumer themselves, hey, I'd like to talk to a physician about medications. They can be engaged by one of our coaches, right, or one of our registered dieticians who's working with someone on diabetes prevention or weight management. They can be -- the consumer can be flagged based on claims analysis in the event that they have a certain set of claims, and then that can be recommended as a next best action for them to talk to a physician and engage with that physician because they've perhaps had an emergency room visit or there's a lab value that's out-of-bounds and therefore, it can be recommended to them that this is an option that they can take advantage of.

Okay. And how are you thinking -- I know you've gotten this question a couple of times, more than a couple of times, but how are you thinking about the economics of the provider-based programs versus just the regular program?

Yes. The subscription fee is a slight premium to our chronic care programs that do not include provider-based care. And we'll see visit fees for the physician consultations and interaction with the consumer. So we see incremental revenue on both the subscription line as well as the visit fee line.

Okay. That's helpful. Mala, I did want to dig into the Integrated Care. You talked about the enrollments in chronic care. When we look at revenue -- average revenue per member, a slight tick down. I'm just curious, is there any thoughts on pricing? Or what's driving that? I assume it's mix shift. You have diabetes prevention program that I assume that's lower than regular diabetes.

Yes. The average revenue per member tick down really is just mix, exactly like you said, right? So if you think about the fact that just in the last 12 months alone, we've added 6 million new members, right? That's a nice robust 7% year-on-year growth. When those members come on board, and we have said this now for a long time, especially if they are virtual urgent care members, they will come on to our platform. And typically, you will see initially, they will contribute less materially to our average revenue per member. So that's really the phenomenon that you're seeing with the significant amount of member adds that we have -- additions that we have had. What is important, though, is these represent -- these members represent a really good opportunity for us to cross-sell the higher revenue products over time. And so we fully expect to take, obviously, advantage of that runway with these new members that we have over -- in the next -- over time. But initially, I would say it is dilutive to our average revenue per member.

But has there been -- across all the chronic care programs, are you seeing growth on all of them? Or is it just like diabetes prevention?

Yes. So if you look at our enrollment performance, which, as I said a few minutes ago, was -- has been quite strong, you're talking about 45,000 program enrollment adds, right? That's a 7% year-on-year growth, 4% sequential growth. We are seeing strength across the board. Yes, diabetes prevention certainly has been a highlight of it, but we are seeing broad strength across the board. And I would say, Richard, that is actually validation and affirmation of the whole-person care strategy that we are following, right? Our clients are seeing the value of that. One of the statistics we have talked about is that, if you look at the consistent trend we have had, both in multiproduct sales as well as multi-program enrollment, that has been a very consistent theme. And if you look at our chronic care members, about 1 in 3 are enrolled in multiple programs. So it is, again, validation of the fact that the strategy that we have been pursuing around whole-person care is actually resonating in the marketplace and with our clients.

Okay. Jason, a little bit on the pipeline, the selling season, where you made some comments on the call, the first half was strong, but payer focus second half is when the employers make their decisions. Can you talk a little bit about the 2 groups or the 2 channels? I guess, are they trying to solve different problems? Or is it similar?

No, I think they're trying to solve similar problems. We did see strength in the first half, especially in the health plan part of our market. We saw a number of clients go, what I would say is sort of all in with Teladoc, where they're buying our entire suite of products and services across chronic care, acute care, mental health care and primary care with our Primary360 product. We -- I would say we turned the calendar to the second half slightly ahead of our expectations for bookings and, as is always the case, the employer market decides in the third and early fourth quarter about their programs. And so we're right in the middle of that selling season. I was just talking to our employer sales team yesterday. And so they're seeing -- similarly, they're seeing robust growth and interest in multiproduct solutions, both for our health plan market as well as for our employer market. We're seeing cross-sell and upsell the majority of our sales. We certainly add new logos. But as Mala said, when we add 6 million new members, we see that as an opportunity for our land-and-expand strategy. And that has continued to be successful. It's part of the reason why we bring additional products and services to market each year because our clients are asking us for those things, and we're able to bring additional services to them. And that's also, I think, why we have retention rates -- client retention rates in the 90s because we continue to deliver value for them. So we're right in the middle of that second half selling season now. I think we'll probably get further insight into that really through October. November, it starts to wind down a little bit and you start to just get the small end of the market, the employer market making decisions. But so far, so good. And we also -- when we talk about the health plan market, many times, we're selling into health plans to get access to their self-insured clients. And so we activate that with selling into the health plans in the first half of the year. And then the second half of the year, we're driving through that channel in order to sell to their self-insured clients.

That's helpful. Mala, can we hit on guidance a little bit? Obviously, increased the free cash flow. That was a nice bump there. Increased the lower end of the ranges on revenue and adjusted EBITDA. But you're still factoring in uncertain economic times. So I just -- can you talk a little bit about, let's say, we do fall on hard times, what part of the business gets impacted? And...

Yes. Yes, you're exactly right. So we raised the low end of the guidance, both on revenue and adjusted EBITDA for the full year. If, again, decompose that into the segments, on the Integrated Care segment side, we are now, because of the strength of chronic care enrollment, which, as I said, was at the high end of our expectations, as we talked about on the call. We are now looking at our Integrated Care segment performance being at the high end -- high single digits. So essentially, we have taken the mid-single digits off the table as we had when we started off the year. On the BetterHelp help side -- and I would say on the integrated -- on the B2B side, it's relatively unaffected by the macros, if you will. The piece of our business where macros do matter, and we have said this, is on the BetterHelp side. So as you know, we continue to guide for BetterHelp to be in the low double-digit to mid-teens revenue growth and 100 to 300 basis points of margin expansion for the full year. The reason we have given that range is, if you think about the high end of the range, we are essentially assuming that consumer sentiment remains strong, that the ad marketplace, if you will, remains reasonable, and therefore, we see a modest improvement in our revenue yield on our ad spend. And those are the 2 factors that will essentially toggle whether we are at the high end or at the low end of the range that we have provided. At the low end, we're essentially assuming that there will be a modest deterioration in our revenue yield to the ad spend that we have in BetterHelp. So I would say BetterHelp is the part of our business, which is, unsurprisingly, it's a direct-to-consumer business and would be impacted by macros.

And Jason, just to end -- we're running up on time here. But you talked a little bit about vendor consolidation. We've heard about vendor fatigue and advocacy plays some roles in this as well with their partnerships. Do you think the opportunity on that in terms of an employer or a health plan consolidating their vendors, that provides an opportunity for maybe growth to accelerate for you guys? No, I'm not trying to get you to provide long-term guidance or targets or anything. But...

That's good because I won't. Look, I think there is strong demand for whole-person solutions. We are seeing that in our Primary360 growth, which, although off a small base, has been accelerating and is multiples of what it was last year. We're seeing that in clients buying from us across the entire cardiometabolic suite. And we're seeing that with robust interest in our mental health solutions. And what we really are finding is that people understand the connectivity among all 3 of those, right? And so I feel good about our long-term prospects. We continue to be off of a larger base. And so every year, accelerating that growth becomes harder and harder. But those are good problems to have, right? We're now projecting to be over $2.6 billion in revenue. That's a far cry from when you and I were sitting here a few years ago, right? So I feel good about the long-term prospects for our growth, and I feel really good about our competitive position.

I would also add, this is where -- the fact that we have $900 million on our balance sheet -- of cash on our balance sheet and the fact that we are projecting approximately $150 million of free cash flow generation this year. We are increasingly having conversations with clients who are asking a lot of questions and scrutinizing the financial viability of the vendors they choose to partner with. And I think this is where the strength of our financials and our balance sheet is a real advantage.

Great. We're out of time. Thank you so much. I appreciate you driving up.

Thanks, Richard.