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

All right. Thank you, everyone, for joining. It is my absolute pleasure to introduce Teladoc Health, next. We have CEO, Jason Gorevic, longtime CEO; CFO Mala Murthy and then we're seeing a couple of them on the stage, but everyone say hello, Patrick Feeley, Head of IR.

Thanks for having us. We're happy to be here.

Are you going to be happy, because I'm asking a lot of really hard questions.

Let's go, bring it.

All right. Let's start with where you've been. You have been for the better part of a decade a momentum growth company and the entire time you go public momentum growth. Corona not there anymore, right?

Well, I think we're -- as I said on our last earnings call, I would say the economy is in a period of transition. The entire space is in a time of transition. And I would say the company, broadly speaking, is in a time of transition. We've gone through an incredible phase of growth over a long period of time. We were 50 million members, and 4 million visits in 2019. Everything changed over the course of the next 2 years, went through a massive phase of growth. We've come out the other side with consumer expectations changing from I can get my sort of immediate needs met in an urgent care manner. We call that general medical services. All the way to now, I can get my chronic care taken care of, I can engage longitudinally in our primary care relationship to get my mental health care taken care of? And what all that together, we refer to that as whole person care. And focused on going from a top line growth-oriented company that was focused primarily on market penetration, growing the scale of the business and driving that top line growth to a company that's more focused on a balanced approach to growth. And I think that's reflected in our EBITDA numbers and our cash flow numbers. And I think that's appropriate given where the stage of the industry is and where the economy is.

Well, I feel like when I first covered you guys, it was so much debate around like is telehealth ever going to be a thing or who's going to win the arms race. But like the war is over, like you won it. And so is the next portion then is cost control; is it the adjacencies, you talk about as people go and access the care more? Is it necessary to have all the parts of your business together?

Yes. I think we are entering a phase where it's as much about how the parts work together as it is about each of those individual parts. And we know that we drive better clinical outcomes, greater cost savings and achieve better economics for the company when we have multiple products in a given population when we engage a consumer across multiple products and when we develop that longitudinal relationship. And we're also constantly looking for other growth channels for all parts of our business. We've now talked about adding, for example, weight management to our solution -- our set of chronic care solutions. We're very early in the adoption curve when it comes to virtual primary care and a Primary360 product. And on the DTC side of our business, we've certainly -- I mean, that business has scaled incredibly quickly. And now it's time for us to look for other parts of the market and potentially other parts of the world to drive that growth, while at the same time, we look to drive better efficiency in our business to take cost out of the business and achieve greater and greater profitability.

And I would also say Stephanie we don't view that as necessarily and or it's an end, right? So if you just think about the fact that we have 90 plus million members that we can continue to cross-sell and to continue to penetrate in various -- lots of opportunity for growth there. The fact that our clients come to us for a variety of reasons. One of the important reasons is the fact that we offer the breadth of products and services that we do. We've seen there is vendor fatigue and frankly there is also member fatigue. Members don't want to download 5 different app, so they want to come to one place and we are that solution. So those are the ways we continue to grow, our view is when you talk about cost control, it's not cost control to an end itself, it is the fact that we can use the efficiencies to plow it back to continue to invest in the business, add to our capabilities, which will drive continued top line growth and that itself will also drive leverage in the P&L and continue to expand our margins. So we view it as an and not an or.

Yes, I think I'd look at our business in sort of 4 parts, each at a different stage on the maturity curve, right? If you think about our general medical business, general medical is pretty penetrated across...

You own that. If you don't have telemedicine now, it's what...

Right, exactly. Everybody's got it, right? So that's a replacement business for us. Now we do continue to win business and takeaways like you did last year. But that's primarily a penetrated business. Mental health of 90 million members that Mala mentioned, about 55%, 57% of them have our mental health product. That still provides a lot of running room for us to expand. Our chronic care products -- only 16% of our members have our chronic care products. There's a lot of opportunity for us to penetrate that base with those chronic care products. And then lastly, virtual primary care is really still in the first inning, right? We're at the very, very beginning of that adoption curve.

Where do you think we are in that virtual primary care folks? I remember last year, it was they're just starting to really have conversations about it. Are they in adoption phase now? Or they still kind of kicking the tires?

Like many things in health care, the large progressive employers are the early adopters, right? So that's almost uniformly been the case for all new innovations in health care and managed care and care management, disease management. Those large early adopter employers are starting to lean in. And so I can think of one we were just doing a quarterly business review, and we're talking about one of our large employer clients who adopted our Primary360 and a virtual first health plan and is seeing just incredible engagement rates with our product. Literally over 80% of the people who enrolled in the product have already engaged in just the first couple of months of the year. And so that's an example of where -- yes, we're in the very, very early stages. It's the early adopters who are leaning in. The proof points are starting to materialize. And look, I think that's on us. We have to generate enough proof points that we can demonstrate to the market that clients should be leaning in and developing those plan designs and building them around our Primary360.

We need to talk about virtual urgent care. I remember we talked about the competitive landscape. And it sound like you list like the top 10 and then there was this long tail. So the earlier point that you've kind of won the war and there's not -- I don't know if there's another virtual care player that's even cash flow positive.

Virtual primary care, there's almost nobody out there. There's certainly nobody out there who has any scale. What we're doing is we're really engaging the consumers who are engaging with the health care system. So when we look at our numbers, something like 60% to 65% of the people who have a virtual primary care visit with us, haven't seen a doctor in the last 2 years. So we're, I would say, engaging the distant franchise from the health care system, which is a tremendous needle mover for those plan sponsors, whether that's a large employer or a health plan on -- whether it's a commercial population or a subsidized population.

It's also I think -- an important point is if you think about the product itself, right, our product is differentiated in my view, right? You have lots of people saying they do virtual primary care, but it is a little bit of, say, virtual urgent care that they're calling virtual primary care. But if you actually think about our product, you have a longitudinal relationship that a member can choose. And we wrap an extended care team around the product -- around the members. So it is really a differentiated product. And I think that's why to the point that Jason made the fact that we will get the learnings from usage of the product, and we will continue to learn, refine with the data we have.

And unlike glorified virtual urgent care, we wrap all of our primary care products with our chronic care programs with our mental health programs with our nutrition programs. That is a true primary care, virtual medical home as opposed to something that's there on demand and they dress up like primary care.

Is this a question of demographic shift? Like is it, my junior is not having a primary care physician and then going to virtual, because that's how they consume the world.

So the population who engages does skew younger, but it's not dramatically younger. It is modestly younger than the average within a given population. But it's not dramatically younger, it's not dramatically healthier. So I think that's a fallacy. It makes sense, right? I understand why people think that. But we actually see that it's pretty representative.

So you mentioned, you have 90 million members on you platform. That's like 1/3 of the U.S. Where is the rest of them?

Well, so a lot of them have some sort of a virtual urgent care program through either their health plan or they access it through a local provider system or something like that. What's lacking there is where do you go, right? Where do you go from virtual urgent care when you need more than that, right? And so what we find is that our general medical product is an on ramp for our other programs, right? We can identify that someone is in need of mental health care support or in need of chronic care management or doesn't have a primary care physician. It also creates habitual use. So that's something where -- when someone comes to us because they have a sick child or because they're traveling and they need care or because they've come down with COVID or the flu or something like that, that starts to open the door to us becoming their front door to the health care system, which is ultimately where we're going. I think if you look out 5 years, you're going to be surprised at how many people when you ask them the question, well, where do you get to heath care? The answer is Teladoc Health. Their front door to the health care system is going to be our services and our brand because of the breadth of clinical offerings and because of the ease of access that is really not found anywhere else.

So I'm guilty of this. I'm one the users, that I just -- I'm tired, I don't have a lot of time, I'll use virtual care. Have you been able to identify what percent of your users or maybe the more frequent "this is my front line of care" user base?

I mean we certainly have power users. There's no question, right? And we can identify who they are and frequently, we're engaging them for then to expand the scope of the services. So they know about all of the breadth of services that we can offer them. And we talked about -- I mean, you remember, years ago -- if you rewind 10 years ago, we were teaching people that virtual care existed, right?

And the utilization was horrible.

Yes, exactly. So it was a situation where we were teaching them it was available, and it was a legitimate way to get care and that it was high quality care. We no longer have to fight that battle. The battle we have to fight now is educating people on the breadth of what they can get from us through a single front door entry.

I would like to say, if you think about the assets that we have over 90-plus million members. The opportunity for us to continue to penetrate that base and give more people access to all of the breadth of our products, I think is going to be an important source of our growth going forward, right? We've talked about the fact that if you think about that base, over half of them have access to mental health. There's still room to grow there. Chronic care is only about 16% penetrated, right? So if you think about the opportunity for us to continue to drive cross sales, we have said now for several quarters that our cross sale is a big source of our bookings, expansion -- what we call our land and expand with our clients is a big driver of our booking. And so I do think that there is an opportunity with the 90 million base, we have. You talked about where are the others, well within the 90 million that we have, there are huge drivers of growth.

We illustrated earlier this year, an example of an account that in 2021, bought a single chronic care program from us and represented about $19 million of revenue and then expanded over the course of the next really 2.5, 3 years to include our general medical services, where we replaced another competitor and the full scope of our Primary360 and chronic care programs and now represents over $60 million of revenue for us. That's a great example of what Mala is talking about our ability to land and expand and bring the full breadth of our programs to bear for our client who really -- what we're seeing in the market is vendor consolidation is very real. There is a significant benefit both in terms of the operational lift that we take off of the clients so they don't have to do the integration as well as the impact that we have both in terms of financials and clinical outcomes.

Well, let's pull on that thread a little bit, right? Vendor health is becoming so important when you talk to plans, when you talk to employers, how much is your sales team flexing that strength? And when you think about how it's becoming more cross-sales driven on Mala's part, are you looking at your sales team differently of the hunters versus farmers, and how you want to manage that structure?

Definitely, I mean the number is what, 75% of our sales last year were cross sales and upsells, right? So there's no question that with that 90 million number base and only 16% penetrated with our chronic care programs, we're going to get more growth out of that than we are going and opening new doors. It doesn't mean that we're not focused on opening new doors as well, but if you look at our sales team, we skewed toward upsell and cross-sell more than opening new doors.

I don't know if you need to open new doors, Jason. I think at this point other doors are closing, and you're going to get the door.

We have to be there in order to walk through it when the door opens.

The other interesting aspect that I have seen, I would say in the last year to 18 months, when Jason and I sit in on final presentations with our clients. We did a lot of questions around our financial health and cash flow.

I still get that, when I picture stuff, people still say that when are they going to be cash flow positive. Mala, when're you going to be cash flow positive?

Well, if you look at our free cash flow from last year, right, close to $200 million, the guidance we have given is over $200 million. And that is certainly a point of interest amongst our clients because they want to partner with vendors who they know will be there and more importantly, have the flexibility to innovate, to invest in innovation. So those are the increasingly the kind of questions we get.

Well, how do you answer that? How are you innovating? What are you buying?

Yes. So look, I think this is where -- the over $1 billion cash that we have on our balance sheet, the fact that we are generating over $200 million of free cash flow, gives us the ability and confidence to say, look, here is how we plan to invest it back into the business to drive sustainable revenue growth. We know that, Jason talked about us being the virtual home. What does that mean? To make that a reality, we have to continue to add to our capabilities, right? We have to continue to add to the conditions that we will address. That takes investment, that takes innovation. And if you look at the technology and development investments that we have made, the integrated consumer app that we have rolled out, that's a perfect proof point of the fact that we are investing in innovation in our business. And that is what clients would like to do for us.

And then we've said publicly that this year will come out with a significantly advanced weight management program that includes the management of GLP-1s. We've said that we're coming out with pediatric and adolescent care this year. We continue to be actively looking for opportunities for appropriate and prudent M&A to expand our clinical footprint and the breadth of our clinical services. And we're going to do it in a disciplined manner, right? So the private markets haven't yet come in line to the degree that the public markets have come down from a multiple perspective. And as you know, there are a lot of money-losing companies out there that are bleeding cash. And so we try to be disciplined about where we look, what we're willing to pay. And how much of a burden it will take on with respect to a money-losing EBITDA-negative company?

Can I use the last 5 minutes to harass you on BetterHelp.

Sure. Let's go.

I guess that you called out less ad spend efficiency, but it's a $1 billion business and D2C behavioral health. Do you think the market might just be saturated. Do you ever think it would be that big?

It certainly has grown faster than I expected to. We bought that business at the beginning of 2015, it had done $1 million revenue in '14.

I think I still have it in like the M&A part of my model, like "oh, look at that."

So I mean it's certainly grown faster than we expected it to. I don't think the market is saturated. And the reason I don't think so is because when we look at our customer acquisition costs across channels, we see it elevated in certain social media channels, but not elevated in other channels. And so if the market were really saturated or if the health of the consumer -- we're really putting pressure on acceptance or willingness to pay. We would see it across all of our channels. We're just seeing it in very specific channels. . The other thing I would say is it depends on how you define the market, right? The market -- we have basically had the same product going after the same part of the U.S. market. for years, basically, since we started at it in 2015. So our opportunity is to expand into international markets and lean more into that. We've got good early traction on that. We're over 15% of our BetterHelp revenue now comes from outside the U.S. And we think that there's significant opportunity to expand that. There's also opportunity to go after higher ends and lower ends of the U.S. market that we haven't really done thus far with different price points and different product configurations. And so I don't think we're saturated by any means, and we're going after new parts of the overall market to open up a significantly greater TAM.

Do you think the opportunity then is probably more of a covered benefit for some of these underpenetrated populations? Or is it more -- I know you want to talk about international, is it where the international opportunity and BetterHelp and how you can scale that?

So I would say, if you think about the international opportunity for BetterHelp, Jason talked about the fact that it's about 15% today. It's growing faster than the U.S., right?

So any framing you can give us on its growth?

No, I'm going to stop short of that. But look, we -- the BetterHelp International business is today in a few English-speaking markets. Our near-end opportunities for growth is to increase penetration in those markets. Take the learnings that we have there and look at other international markets to expand in to. The other thing I would say, Stephanie, is if you think about direct-to-consumer mental health, look, it is -- virtual modality is uniquely suited, right? Just given the fact that insurance coverage access continues to be subpar. So there is a tailwind, if you will, from that. There is continued online demand -- there was continued demand for therapy. And if you think about market share shifting from brick and mortar to online, there is also a tailwind. All of that said, though what we have said, on our earnings call, is you also have to be realistic about the fact that a business that is now over $1 billion in revenue. There is a lot large numbers in terms of -- the fact that's not going to be at the hyper growth that it was, but we will continue to get at the efficiencies from an ad spend perspective, we will continue to look for opportunities in international. We continue to drive product and user experience in innovation that this business has done really a good job in the last several years.

10 seconds on the international expansion before I let you guys go? How should we think about the timing of those rolled outs. Is this just a question of it's an English speaking country, you have the app, let's just advertise in different areas? Or what is the uplift?

I would say the countries that you're already in and getting deeper penetration into that. I would say is very near end. So think about the next 12 to 18 months, you should be seeing that. Beyond those, expanding into other markets remember, we're balancing top line growth with margin and capital efficiency. So we need to look into how those factors play out into those other markets. We're just not going to chase revenue growth for revenue growth sake.

Love hearing that. All right. Well, thank you so much, guys. I really appreciate having you on the stage.

Thanks, Stephanie.

Thank you.