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

Thank you, everyone, for joining us for our next session here. We're really pleased to have Teladoc Health and presenting for the company is Mala Murthy, Chief Financial Officer; and Patrick Feeley, Senior Vice President, Investor Relations. So thanks for being here with us today. We appreciate it.

Thanks for having us.

Maybe we'll dive right in here and maybe let's start with the BetterHelp. Obviously, an area that a lot of people are very focused on. And what I think is interesting, we did a survey -- consumer survey back at the end of last year and it really indicated that Teladoc remains sort of the clear leader in virtual behavioral health and 36% of respondents say, their either Teladoc or BetterHelp. You've guided for BetterHelp growth, flat to low single digits in '24 and sort of the low single digits over the next 3 years, kind of pointing to the higher customer acquisition costs as a gating factor of the growth. I guess, first, given all the positive tailwinds for behavioral health, shouldn't we be able to see faster growth in BetterHelp? And is there a path to reaccelerating that growth?

Yes. So look, you are right. If I step back and take a look at BetterHelp today, it is by far, the largest scale player in the direct-to-consumer virtual mental health care space. It has been in hyper growth mode for the last few years, right? Just a few short years ago, I think it was maybe 3, 4 years ago, it was less than $100 million. And today, it's over $1 billion in revenue. And the benefit of that scale is a few, right? One is we are able to attract a nice, large stable providers and therapists because it's a great 2-sided marketplace, they are assured of visit volume. And the second is it actually allows us to diversify from an ad spend perspective. We advertise across several ad channels. We are not overly reliant on one particular channel. In terms of the tailwinds, as I look forward, I'd say, yes, you're right. There is still an unmet need for mental health services. And as we have talked about, Charles, in the past, virtual modality is, I feel, uniquely suitable for mental health. So that tailwind absolutely exists. But if I take a step back and look at the business and the growth and you -- as you said, we talked about flat to low single-digit revenue growth this year and looking out, we have guided to low single-digit growth going forward. I think there are a few dynamics playing into it, right? First is for a business that's now over $1 billion in revenue, it's a larger number to drive growth off. So naturally, it will not be in hypergrowth mode anymore. The second is for us to grow in BetterHelp, we are the largest in revenue. We are also the largest in terms of ad spend that we put against that business. For us to grow revenue, we would have to put incremental ad spend and the amount of incremental ad spend that we can put in is somewhat gated by what returns we can get from an efficiency perspective. We are hyperfocused on return on capital and cash flow yield. And so that does put some, I would say, constraints in terms of how much growth we will go after, we will not go after revenue growth for revenue growth sake. We will be disciplined in terms of cash flow and return on capital because we believe that is value accretive. So that is certainly a factor in how we are thinking about balancing top line growth with bottom line growth and cash flow. Having said that, in the channels that we are in, there is a natural tailwind in terms of how those channels grow, right, like podcast, for example, they will continue to attract users. And that will provide a tailwind for our growth. So if you think about how we will grow, it will be a combination of the fact that we will put more ad spending into these channels up to the point of efficient returns. The channels themselves will grow. And then as we have talked about on our recent earnings calls, expanding geographically. We already are in some geographies like U.K., Australia, Canada. So continuing to look for expansion internationally as well as additional products on the platform.

Yes. That's helpful to frame it. I guess maybe to ask about this metric of sort of an efficiency, the return on capital. How much of that is tied to sort of the LTV of the member? So sort of -- I know in the past, we've talked about sort of the average subscription length. Is it right to think that the longer you could hold on to a member that would allow you to then put more capital into ad spend because you can get that same return?

Certainly, I would say, look, the metrics we look at, which, by the way, have been stable, I would say, our churn. So you get members or you spend ad dollars, bringing members onto the platform. And then there is a natural churn. Churn metrics have been very stable in the BetterHelp business. We do look at lifetime value to CAC and the revenue yield from the users that we are getting. And we will continue to build on the product features that we have. One of the things we have found with BetterHelp is the reason that we are able to attract the users we do and the providers that we do, we have really strong, both consumer NPS and provider NPS scores is because of the product and the experience that providers and users have on the platform. And that is what contributes to both NPS and them wanting to actually stay on longer into the platform. So those are the kinds of things that we will continue to pursue.

That makes sense. Do you think that the macro environment -- I know a lot of concern over the last couple of years has been the macro environment and the impact to consumers on discretionary spending, I think until more recently, I don't think we ever saw any signs of that, perhaps till now. Are you starting to -- do you think you're starting to see some impact on consumer discretion spending having some impact on demand?

Look, we got the question a lot today in our investor one-on-ones. And I would say it's really hard to pinpoint. And here's why. I think there are a few different factors and dynamics that influence this business. The first is, we haven't really lived through any type of recession off the path, right? Virtual Care really wasn't scale. BetterHelp really wasn't scale through past recessions. What we have talked about is it's reasonable and logical to say, if consumers are certainly feeling pinched in their wallet, might there be some reluctance to spend the $200 -- between $200 to $300 that they spend on this product, that may be the case. On the other hand, so that could be a little bit of a headwind. On the other hand, a tailwind could be that in a recession to the extent that they are losing employer-sponsored coverage, they are willing to pay cash out of pocket for BetterHelp product, which is cheaper than brick-and-mortar therapy. So that would be a tailwind. And then last but not least, certainly based on the more recent dynamics we are seeing, there is the dynamic of ad pricing across various channels, right? How is that playing out? Because, again, we manage this business for efficient returns on capital. And so therefore, the ad pricing dynamics do play a factor.

Yes. I think one way when we look at some of the competitors in the space, we saw -- we've seen a deemphasis a bit on direct consumer, maybe an increased emphasis on direct employer sort of a B2B strategy. I know you guys are trying to develop a B2B strategy. Do I -- if I'm not mistaken, that's really more through the Integrated Care segment with myStrength Complete. Any way to leverage the scale that you have in BetterHelp over into the B2B side of the market?

Yes. Look, I would say BetterHelp right now is still got room to grow on the direct-to-consumer side. We are scale, I would expect us to continue to grow, drive efficient returns, drive cash flows for that business. We don't have any immediate plans like a number of our much smaller competitors have done in recent times, right, pivoted away from DTC to B2B because they weren't able to drive, get to scale as they competed with BetterHelp. So I wouldn't say that there is going to be a mass pivot of strategy away from DTC to B2B, Charles. What I will say is a couple of things. One is, yes, we are absolutely looking at all opportunities for synergies between the B2B side of the house and the direct-to-consumer side. One of the examples is, I think BetterHelp has done an incredible job in mining, data, AI, machine learning, large language modeling as we think about matching consumers with therapists. Those are things that we absolutely are leveraging on the B2B side of the house as well. Patrick, anything else?

No, I think you covered it.

I guess maybe just talk about the B2B offering, myStrength Complete. Is that same as BetterHelp? Or is that more of an automated kind of self-directed product versus BetterHelp?

Yes. I mean myStrength is one specific product in the B2B suite. And to be clear, BetterHelp is, I think of as the brand we go to market with in the direct-to-consumer market. On the B2B side, we go to market primarily with the Teladoc Health brand. So we have Teladoc Health Mental Health, which includes therapy. We also have digital products, which myStrength is what you're referring to as part of that suite product. And so the myStrength Complete product that you referred to is really kind of taking all of those capabilities on the B2B side, putting them together and going to market with therapy, digital tools to use in between therapy visits and whatnot.

Do you share networks providers between the 2? Or is that separate? And is that a point potential for leverage between the 2?

So the therapist network on the BetterHelp side, which is large, is separate from that on the B2B side. Look, there are certain providers who overlap between the 2. But the credential requirements are different, and so those are 2 different networks.

Okay. You mentioned a little bit earlier about expanding geographies, I think about 15% of revenues in BetterHelp is international. Maybe, you talked about a few of the countries you're in. Maybe talk about sort of your international plans at this point. Where can we think you can go? And maybe a little bit, what do the economics look like in the international markets compared to here? And how that can contribute to growth as we move forward?

Yes. So yes, you're right. International is about 15% of BetterHelp's revenue has been growing faster than overall BetterHelp. Our plan for international expansion in BetterHelp is first focusing on the markets that we already are in. There is an opportunity for us to penetrate further into those markets. These are English speaking markets, Canada, U.K., Australia. I would say, over time, we will test and learn our way into additional markets, right? Mental health, as I always say, is a global problem. It's not a problem for the U.S. or English-speaking countries. So to the extent that we find other markets where we have an efficient deployment of capital, we certainly are looking to expand into other markets. From an economic standpoint, what I would say is based on our experience in the markets we are in, the return on investment is very similar. The economics are similar to that in the U.S.

Okay. Maybe switching gears, Integrated Care. I think last week, you mentioned that sort of 16% of your general medical client base has access to one or more of the Chronic Care products currently. And that's up from 12%, obviously, so over the last couple of years. But I remember, Jason, kind of caution and say, "Well, we probably won't get to 30 to 40 anytime soon." And I guess -- what can we do to get that fast? Because I would imagine there's a natural synergy there. So why is that the case? What is sort of the decision-making process for clients when they're -- if they're a general medical to evaluate sort of a chronic care suite?

Yes, it's a really interesting question. So this is what I would say. Here's the good thing, right? If I take a giant step back and look at our business, we have over 90 million members across thousands of clients, right? That is our gen med business that has been built up over a number of years. That is a very stable base of members that we can cross sell and penetrate further into. And that's essentially what we have been doing for the past few years. If you think about the fact that over 75% of our bookings are multiproduct, right? If you think about the fact that the -- within our Chronic Care programs, the multiprogram enrollment is over 30%, right? All of that has been methodically sort of increasing over time. To your question around what can we do, here's what I would say. As I listen to sit in on client presentations personally and listen to the questions that they ask, right? Where we differentiate ourselves is on a few things? The first is the market is evolving towards bundled solutions towards whole person strategy towards vendors and partners who can bring multiple solutions, not single point solutions. Now it's not as if the entire market has switched over to that. That is not the case. But it certainly has been evolving over time towards that. And I think that is where the fact that we bring a bundle of Chronic Care products, right? We have mental health, we have gen med. We have all of the products and services, the breadth of products and services and the quality of products and services that we offer is truly, in my view, competitive advantage is a differentiator. So I would say that is one. The second thing is the fact that we are as financially stable as we are, right? We have over $1 billion of cash on our balance sheet. I get asked more these days than I have ever before in terms of our cash flow, our financial strength, our financial stability. And I would say, again, they are seeing smaller private competitors struggle from that perspective, right? And their question really is around, do you have the capital to invest in innovation, to invest in products. So I would say continuing to build on our stable and suite of products and services, refining them, making them better, adding features, adding products and services. That is how I would say we continue to appeal to our clients is both the breadth and the quality.

Just as how much is member like utilization metrics when clients are evaluating, adding Chronic Care. Is there a minimum size like -- maybe like what a 50-member employer consider it because maybe it's just not enough? Like is there some minimum threshold, 5,000 employees or 500 employees, where the return for purchasing a Chronic Care suite starts to just become a no-brainer versus maybe it's a little bit more uncertain?

I'm not sure there's a difference between the size of the client. I mean, we have...

Down market clients.

Down market clients. So we have very large health plan buy in. So I don't think there's any difference in purchasing decisions based on the size of the client.

And remember, we get paid for Chronic Care depending on how we enroll, right? So that is where our engagement capabilities and our enrollment capabilities truly do make a difference. And I would say, with all the technology investments we have made in the past few years on data, on AI where we are seeing that sort of come to life for us from a business benefit standpoint is greater and greater hyper personalization of our engagement with members, our enrollment with Chronic Care enrollees.

Okay. That makes sense. And then I remember last week, you guys kind of talked about 75% of bookings came from sort of selling into existing clients. Maybe kind of getting back to something you just mentioned earlier. When you're talking to prospective clients, both either existing or not, and you say, like, what are the questions that they're asking now? And how has that changed in terms of like what they're looking for, I guess?

Yes. As I sit in on these client conversations -- look, ultimately, it comes to value. What is the value you are driving, Mr. or Ms., partner or vendor. And I would say that is the way we are able to drive value with our clients is, number one, it is the breadth, if you think about whole-person care and our whole-person care strategy, the fact that we have the breadth of the solutions we have the products and services we have actually enables us to drive better clinical outcomes. Think about Chronic Care along with mental health. Think about weight management along with mental health, right? So it is that breadth of products and services. Clients talk about point solution fatigue, vendor fatigue. They are looking to consolidate their relationships. And that is again where the fact that we bring the whole-person care strategy to bear comes to life. So I would say that's the case. In some instances, certainly putting our fees at risk, right? I think it's going to be increasingly be table sticks in Chronic Care. So whether it be the fact that we have been driving clinical outcomes for a while. In some instances, it is about cost savings. So those are the kinds of conversations that we are having with our clients.

And if we put this together, you're kind of guiding to sort of mid-single-digit growth in Integrated Care. So similar question to BetterHelp given sort of desire from customers for multiple solutions, not point solutions. What are the opportunities here to sort of accelerate that growth again?

Yes. If I think about the -- what we talked about in terms of our outlook for Integrated Care, which we said is mid-single digits. We also talked about the fact that it's really 2 -- sort of tale of 2 cities. We have a gen med business, right, our virtual urgent care business that is very highly well penetrated, which is a stable book of business across our 90 million members, across thousands of clients, and we still have a high retention rate of clients, right? So that sort of -- we expect that to grow in the low single digits. On the other hand, you have your Chronic Care and international businesses that would be growing in the mid- to high single digits. So I would say, if you think about the fact that across our gen med base, Chronic Care is still only penetrated to the extent of 16%. It's the one of the questions you asked earlier, that still means there is a runway for growth. in that business, right? So that is -- those are the kinds of areas where I would say we expect to see and drive growth. And then the last thing I would say is in terms of continuing to expand on our stable of products and services and the clinical conditions we address, certainly, we will continue to invest in our business. We will make surgical choiceful bets in the business. And we will look at tuck-in M&A as we talked about on the recent earnings call.

Yes. Maybe touching -- a jump into that real quick, right? You're now in a position where you're generating increasing amount of cash flow, obviously, a tremendous amount on the balance sheet leverages net cash or close to, right? What are the priorities here? What are you evaluating when you're talking about strategic M&A. Is it require customers? Or does it require capabilities? What are you most interested in looking for at this moment?

I'd say it's a combination of two things. One is looking to add to the conditions that we address, right? And so that is certainly something that we could see bolting on to the rails that we have, and using our distribution engine, if you will, our distribution muscle across the 90 million members as a possibility to just drive scale synergies relatively quickly. So that would be one. The second is geographic, right? We are international. And so to the extent that there are opportunities for us to penetrate deeper into the markets we already are in or to enter new markets surgically, I think those would be how we would evaluate.

When it comes to -- when you just talk about mental health on the Integrated Care side, right, it's a combination of sort of high touch and low touch capabilities. Is that the case across all the Chronic Care offerings? Do they all have a high touch and low touch component? If not, is that ultimately what the market probably likes? Because I imagine there's instances where I can be self-directed, but I might need to get triage to a higher level of care.

Yes. I mean I would say, for the most part, the Chronic Care solutions are primarily digital. The primary way people are interacting with those products is digitally. But we have, however, that was the ability to step up with the Teladoc physician or a provider care extender...

Or coach.

Or coach. When things are going a [ rive ], when levels are moving in the wrong direction or when a member proactively raises their hand and says, I need help. And then we can step you up to a physician or again, care extender to get you back on track, reevaluate your care plan, maybe your medication needs to be titrated. So when we're seeing those things happen, we're able to do that to prevent the exacerbation of whatever might be happening in that particular member's journey. But again, that's a small minority of what's happening. Most of it is going to be digital. Most of the people are going to self-manage digitally and through the feedback that's coming from AI as part of the product itself.

And Okay. That makes sense. Because I was thinking about Primary360, right? And I think you said last year, it contributed about $30 million. So still sort of in the early stage. How are you thinking about Primary360 really as a vehicle to deliver the Chronic Care suite? Because ultimately, over time, could you add that it's not -- look, if you were Primary360 customer, do you get effectively all the Chronic Care capabilities as well? And does that become the vehicle to really be what the future of the integration...

Yes, it's a great question. We certainly -- the way we have designed the product, which, in my view, is truly differentiated from the lots of other so-called virtual primary care solutions in the market, which many of which are actually virtual urgent care solutions. In our case, the product, in my view, is truly differentiated because you have the member having essentially in the care of a physician, it's a longitudinal relationship. And then we wrap around a care team, whether it be nurses, whether it be extended care team around that. And certainly, what we have in mind is to me, when you hear Jason talk about whole-person care, virtual primary care would be sort of a great example, a great proof point of whole-person care. So exactly to your point, it is an on-ramp into all of our other products and services, whether it be mental health, whether it be Chronic Care, that's certainly the case.

I think of it almost as like a virtual medical home, right? Like so you have that front door into the system through -- if you were personal on chronic disease, maybe you're interacting with your meter every day or your blood pressure cuff and we're giving you digital feedback, but then we're able to intervene with the care team. And Primary360 certainly wraps around that. So it works both ways really. People leading with the Chronic Care product, you can pull through Primary360, people with Primary360 a natural fit to move those people to chronic care solutions when they need their care managed.

And would your provider within Primary360 have access to the data that they're seeing if you're using any of the digital solutions on the Chronic Care side?

Absolutely. The entire care team would have access to all of that data.

I think the biggest challenge in my mind is a lot of people have a primary care doctor, whether they see them consistently, not in their mind say, I still have a doctor. What are the big ways, A, is there a patient demographic that is more easily suited to a virtual like Primary360? And then for those that are -- who claim to have a doctor, maybe don't see them all time. How do you convert them? How do we drive that adoption faster?

Yes. I will say at least what we have found over the past couple of years of history that we have had with really rolling out. A lot of them, like we had expected was people who haven't -- who don't really have a primary care relationship or who have but haven't seen their primary care doctor in years. So they are the ones who have been, if you will, from a member perspective, early adopters of our product. And from a client perspective, what we are seeing the early adopters of Primary360 to be, those who are laser focused on holding down healthcare costs, health exchanges for one. So those are the ones that we have seen as early adopters. Look, I think that there is -- if you were which you are asking me, how do you see this ramping up? And how can you ramp up? I would say quite candidly, our learning through this has been you just have to be able to prove out that it is a better product, better consumer experience, gets to better clinical outcomes actually helps drive spend -- healthcare spend down, and that will take time.

Okay. So far, though, those KPIs, it sounds like -- would you say you're on track to kind of deliver on those -- I guess what you're seeing with the prove-out...

So I would say with the relationships that we have contracted with clients, we are in the process of actually truly rolling the product out, seeing the metrics, driving utilization as an example because, again, you're only going to drive savings if you can help drive utilization. And that, again, takes time. So we are in the process of mailing out the campaigns that will drive the utilization to this. That will, in time, be able to allow us to promote how effective has this been in terms of medical cost savings.

Yes. And then I guess the last question here, profitability versus growth. And this kind of maybe ironic perhaps right, that -- and obviously, there was a big demand for profitability a few years back, and you've delivered on that, right? Obviously, it's come at the expense of some growth. Given that you've definitely demonstrated to the market that you can drive profitability and drive free cash flow generation. Is there an opportunity to maybe tilt the balance back a little bit the other way? Just I mean -- how are you thinking about...

So first, I just want to sort of slightly rephrase what you said. It's not to me that we have driven profitability at the expense of growth. I want to be very clear on that. It's not as if we are not making the investments that we need to make. We absolutely are making all the investments that we need to make to drive both short, medium- and long-term growth. Look, the philosophy that we are using is, it is about driving value and value means return on investment, value means driving cash flow and cash flow yield. We are not going to chase growth for growth's sake, right? Because we believe that, that is value disruptive. And so therefore, I don't necessarily see it as a versus, I don't see it as an or, I see it as an and. There is no question that in the long term to drive profit margin expansion, you have to drive revenue growth, right. Like it's not an either/or, it is an and. So we will make the right investments in the business we are not harvesting the business, to be crystal clear. We will make the right -- we will rightsize the business in the areas where we need to rightsize, right? We've talked about the fact that we are -- we have costs to take out to the extent of $35 million of cash this year $75 million in 2025, and that is in areas such as reducing organization, spans and layers, supplier spend G&A-type items, process automation efficiency. I think those are the right things to do to rightsize the business anyway. We will invest that to the extent that we need to in the right strategic bets such that we get the right returns on capital, which will drive revenue growth. So that's sort of how philosophically, I think about sort of the balance between top line growth and bottom line.

Okay. Thanks for the clarification. That's very helpful.

Yes.

Well, we're a little over time here. So we'll just end it here, Mala and Patrick...

Thank you so much. Thanks for having us.

Thank you, everyone.