Teladoc Health, Inc. (NYSE:TDOC) Q3 2023 Earnings Call Transcript

Teladoc Health, Inc. (NYSE:TDOC) Q3 2023 Earnings Call Transcript October 24, 2023

Teladoc Health, Inc. beats earnings expectations. Reported EPS is $-0.35, expectations were $-0.37.

Operator: Good afternoon. Thank you for attending the Teladoc Health Third Quarter Earnings Call. My name is Matt, and I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. [Operator Instructions] I’d now like to pass the conference over to our host, Patrick Feeley, Head of Investor Relations. Patrick, please go ahead.

Patrick Feeley: Thank you and good afternoon. Today, after the market closed, we issued a press release announcing our third quarter 2023 financial results. This press release and the accompanying slide presentation are available on the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Jason Gorevic, Chief Executive Officer; and Mala Murthy, Chief Financial Officer. During this call, we will also discuss our fourth quarter and full year 2023 outlook and our prepared remarks will be followed by a question-and-answer session. Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating Teladoc Health’s performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website.

Also please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied in this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our website. I would now like to turn the call over to Jason.

Jason Gorevic: Thank you, Patrick, and thanks everyone for joining us. This afternoon, we are pleased to report a strong third quarter with results that met or exceeded our key financial and operating guidance. Our performance reflects the fundamental strength of our business and our continued success in making better health available to our more than 90 million members. In my prepared comments this afternoon, I want to focus on three key themes that reflect the value that we’re delivering today and poised to deliver in the years ahead. First, our third quarter results met or exceeded our key financial and operating guidance, strengthening a solid balance sheet that distinguishes us across our industry. Second, the demand for our products and services remained strong with the largest payers and partners globally viewing Teladoc Health’s whole person care as the prescription for point solution fatigue and a disconnected healthcare system.

And third, we are taking additional concrete steps to further accelerate our business on bottom line performance. This includes a comprehensive operational review of our business. I’ll talk more about what that means in a moment. Let’s begin with Q3 results. On the top line, our consolidated revenue grew 8% on a year-over-year basis in the third quarter to $660 million. And as a result of our continued efforts to drive margin improvements this year, our consolidated adjusted EBITDA of $89 million exceeded the high end of our expectations. We were pleased to see revenue from our Integrated Care segment grow 9% year-over-year to $374 million. Compared to the second quarter, revenue grew 4% sequentially, driven in large part by higher enrollment in our Chronic Care programs where enrollment now exceeds 1.1 million active users.

Driven by a combination of strong leverage over the cost structure, improving efficiency and a contribution from performance-based payments earned during the quarter. The Integrated Care segment delivered $63 million of adjusted EBITDA or a margin of 16.8%, which we believe demonstrates the leverage that’s inherent in the Integrated Care business model. Turning to BetterHelp. We recorded $286 million of revenue in the quarter, up 8% year-over-year and within the guidance range provided last quarter. Third quarter margins for BetterHelp improved nearly 500 basis points over the prior year’s third quarter, and we’re on track to deliver material EBITDA growth again in the fourth quarter, which is typically BetterHelp seasonally strongest quarter for margin.

After scaling rapidly to surpass $1 billion of revenue last year, we have since taken a more balanced approach to growth and margin at BetterHelp. This means we’ll continue to prioritize profitable growth that meets or exceeds our return requirements. Customer acquisition costs remain near the midpoint of our outlook range, combined with stable gross margin trends. That means we anticipate landing near the midpoint of our prior full year segment revenue and margin guidance for BetterHelp. The second theme I want to cover is client demand where the environment remains strong for our whole person care solution. In thinking about the selling season so far, I’d call out three key trends. First, while there are still over two months left to go in the year, we are pleased that year-to-date our bookings are tracking in line to moderately ahead of the same point last year.

We’re seeing strength across all key products and channels. Through the end of the third quarter product care sales represent just over half of our total bookings in the US, up incrementally from the same point last year. Next, we’ve seen particular success in pulling through Chronic Care sales and enrollment via our whole person bundled solutions. We are increasingly selling access to multiple Chronic Care programs at a single bundled price point. For example, clients purchasing our diabetes plus bundle enable access to multiple Chronic Care programs, diabetes management, hypertension, and weight management. This has the benefit of removing friction by creating a simpler contracting path opening access to all programs from day one and driving better engagement and outcomes for our clients.

It also meets the member where they are, with more than one quarter of Americans diagnosed with multiple chronic conditions. And by delivering more value to the client, it enables us to unlock better economics. Over the past 12 months, more than two-thirds of our Chronic Care deals included our whole person bundled solutions. That’s helped drive faster program adoption, resulting in total Chronic Care program enrollment growth of 13% year-over-year. Finally, not only are we seeing growth within our existing client base, but we’re also seeing significant competitive takeaways. This is a direct result of other players struggling to deliver for their clients and in some cases fallout from unprofitable business models with weak balance sheets. During the third quarter, we added nearly four million lives to our virtual care programs in competitive takeaways.

While our Q3 results and selling season validate the value that we’re delivering for our clients and members, we also recognize that there is still even greater potential to unlock business performance. We have built a strong and durable foundation for efficient growth, increasing profitability, and generating cash flow. You’ve heard us talk about a more balanced approach to growth and margin. In 2023, we’re demonstrating that we can drive material EBITDA and free cash flow growth despite a lower rate of top-line growth. We will continue to focus on improving bottom line performance and we’re confident that we can continue to deliver significant EBITDA margin expansion, particularly within the Integrated Care segment. There are few things that give us a high level of confidence in our ability to deliver EBITDA and free cash flow growth well in excess of revenue growth over the next few years.

First, we are exiting a period of elevated investment following the Livongo transaction. As many projects wrap up like our Integrated app that launched this year, we expect moderating costs will allow us to drive material operating leverage over the cost structure as we grow our top line. Second, over the past 12 months, we have broadly sharpened our focus on improving efficiency across the organization. You’ve seen those efforts begin to bear fruit this year as EBITDA and free cash flow have consistently exceeded our own expectations, which leads me to three. We’re disappointed with the valuation of the stock today, which we don’t believe adequately reflects the value we are driving today and will continue to drive in the future. At the same time, we also know there are significant opportunities to add value through improved business performance.

To that end, we recently kicked off a comprehensive operational review of the business. This review includes two broad components. First, we have undertaken a portfolio assessment to identify any opportunities to sharpen the focus across our portfolio of products and services and ensure our investments remain highly selective and prioritized in the direction of our integrated whole person care strategy. Second, we are pursuing a comprehensive review of our cost structure. Following our cost reduction efforts earlier this year, we are confident that we have the right operating structure in place to support the next phase of our growth. Meanwhile, we are actively working to identify opportunities to improve upon this operating efficiency. For example, as a part of that exercise, we have begun standing up centers of excellence that will leverage shared services across the business to enable a more efficient operating structure.

We are committed to a thorough review and analysis and we are working with a thir-party to bring an independent perspective. In short, we are accelerating our efforts to ensure that our business is operating as efficiently as possible in order to drive profit growth at a level that is meaningfully higher than our revenue growth over the next few years. We will do this by fully tapping the operating leverage that is a market differentiator for Teladoc Health as the leader in digital health at scale. And we will do this while ensuring that our business remain centered on our mission and that no efficiencies are taken at the expense of keeping our promises to our clients or carrying for our members. We look forward to sharing more details on these efforts in the coming quarters.

And with that, I’ll turn the call over to Mala to review the third quarter and share our forward guidance.

Mala Murthy: Thank you, Jason, and good afternoon, everyone. Third quarter consolidated revenue of $660 million increased 8% year-over-year. Third quarter adjusted EBITDA was $88.8 million above the high end of our guidance range, representing a margin of 13.4%. Consolidated net loss per share in the third quarter was $0.35, compared to a net loss per share of $0.45 in the third quarter of 2022. Net loss per share in the third quarter includes amortization of acquired intangibles of $0.42 per share and stock-based compensation expense of $0.32 per share. Third quarter free cash flow was $68 million compared to $20 million in the third quarter of 2022. We ended the quarter with over $1 billion in cash and equivalents on the balance sheet.

Turning to segment results. Integrated Care segment revenue increased 9% year-over-year to $374 million in the third quarter, growing 4% sequentially. The largest contributor to year-over-year Integrated Care revenue growth was Chronic Care, followed by Primary360. On a sequential basis, the primary contributor to Integrated Care segment growth was the ramp-up of enrollment in Chronic Care programs. During the quarter, we added 49,000 new enrollments in Chronic Care programs, bringing total year-to-date net enrollment growth to over 100,000. We ended the third quarter with Chronic Care enrollment of 1.12 million, an increase of 13% year-over-year and 5% sequentially. The biggest drivers of new Chronic Care enrollment year-to-date have been hypertension, which is now approaching 30% of total program enrollment, followed by our diabetes prevention and weight management programs.

which have each crossed the 100,000 enrollment mark this year. Program enrollment growth has been bolstered by our success in selling our bundled chronic care management solutions. In total, the Integrated Care segment added over 4 million members during the third quarter, ending at 90.2 million. The significant membership growth during the quarter was primarily a result of a large competitive takeaway during the quarter. Average integrated care revenue per US member of $1.41 increased $0.01 over the prior year’s quarter and was flat sequentially. Excluding the large new population added during the third quarter, revenue per member increased $0.04 sequentially. Third quarter Integrated Care adjusted EBITDA was $62.8 million, representing a 540 basis point margin expansion over the prior year’s third quarter.

That margin expansion was driven by higher gross margin due to an increased mix of subscription revenue, an increase in performance-based revenue earned during the quarter, and improved operating efficiency, particularly on the G&A line. The margin outperformance versus our third quarter guidance was primarily driven by lower expenses. Again, most notably on the G&A line. Turning to BetterHelp. Revenue increased 8% year-over-year to $286 million in the third quarter, a decline of 2% sequentially, in line with our guidance range. Average monthly users increased 5% over the prior year’s quarter. Third quarter BetterHelp adjusted EBITDA was $26 million, resulting in a margin of 9.1%. This represents a 490 basis point increase over last year’s third quarter, a reflection of the more stable advertising environment compared to the prior year as well as sustained gross margin improvement.

Now turning to forward guidance. We expect full year revenue to be in the range of $2.6 billion to $2.625 billion, representing growth of approximately 8% to 9%. We now expect full year consolidated adjusted EBITDA to be in the range of $320 million to $330 million, representing year-over-year margin improvement of approximately 200 to 225 basis points. We now expect full year free cash flow of approximately $175 million, up from our prior expectation of $150 million. For the fourth quarter, we expect revenue to be in the range of $658 million to $683 million. Assumed in the fourth quarter revenue outlook is high single-digit percent year-over-year growth in our Integrated Care segment and low to mid-single-digit year-over-year growth in our BetterHelp segment.

One thing I would remind you of, which we’ve discussed previously is that the cadence of BetterHelp advertising spend in 2023 is more heavily weighted to the first half of the year than last year. This change in ad spend cadence results in quarterly year-over-year comparisons that favor the first half of 2023 to the detriment of the second half of the year. Therefore, we do not see the year-over-year growth rate expected in the fourth quarter as reflective of the underlying growth in the BetterHelp business. Fourth quarter consolidated adjusted EBITDA is expected to be in the range of $107 million to $117 million. The adjusted EBITDA outlook for the fourth quarter assumed Integrated Care segment margins between 11.5% and 12.5% and fourth quarter BetterHelp segment margins between 22% and 23%.

As discussed throughout the year, our prior guidance assumed a modest deterioration in the cost of customer acquisitions at the low end of the range and an improvement at the high end of the range. Recent customer acquisition costs continue to trend within that initial outlook range, albeit in the lower half of the range. We believe trends are likely to persist in this range through year-end. And you see that reflected in the revision of the high end of our revenue guidance. With that I will turn the call back to Jason.

Jason Gorevic: Thanks, Mala. Before we go to questions, I do want to share some work that we are particularly proud of in the wake of so much tragedy in recent days. As you may have heard, BetterHelp is offering therapy to anyone impacted by the war in Israel and Gaza at no cost. The support applies to anyone affected by the war anywhere. As some of you know, BetterHelp frequently offers therapy at no cost to those in need through our social impact program. In the past 18 months, we have responded to the Maui fires, Hurricane Ian, the war in Ukraine, the Robb Elementary Uvalde Shooting and Midwest flooding among other crises. While no one has all the right answers right now, I’m pleased that BetterHelp and Teladoc Health can make a positive contribution to healing at a time of such great suffering. With that, we’ll open it up for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] The first question is from the line of Lisa Gill with JPMorgan. Your line is now open.

Lisa Gill: Thanks very much. And Jason I have just have to say that, that’s a wonderful thing that you do. I know this is a really difficult time for a number of people. I really want to focus on a few things. I know I always asked about the selling season, but I want to focus on two areas, and that’s really around Integrated Care. The margins we saw this quarter. How you’re thinking about that business going forward? The significant wins that you said competitively, you had four million lives that shifted over to your Integrated offering. Can you maybe just talk to me about the competitiveness in the marketplace today what you saw in the selling season? I’m sure you don’t want to name who you took those four million lives from, but can you talk about were the single point solutions or the other parties that you feel are fairly competitive to you? Just how do we think about how you’re positioned on a go-forward basis, especially on the integrated side of your business?

Jason Gorevic: Yes. No, thanks, Lisa. I appreciate that, and thanks for the comments on our work with BetterHelp. If I think about the competitive landscape, I think the incidence of us selling bundled solutions really speaks to the power of the breadth of our offering and how that is significantly differentiated from anyone else in the market. As we’ve talked about, the majority of our chronic care management programs make up the majority of our bookings, and the majority of our chronic care management solutions are sold as bundles of services. We’re also seeing very significant wins where we sell additional products and services into existing clients. In many of those cases, we’re replacing single-point solution or more narrow solutions by adding our products into those clients.

And so I would say that the dimensions of our competitive wins come into really three categories: One is where we replace a single-point solution with either a bundle of solutions or by selling additional products into an existing client. Two is where our clients have, sorry, our competitors have failed operationally and/or in terms of the value proposition for the clients and our proven track record of success and value creation wins the day. And three is where we’re replacing someone who, quite frankly, is faltering in this current economic environment because they have a business model that and an economic model that isn’t sustainable. And we’re seeing them struggle either to raise capital or quite frankly, do exist at all as a going concern.

So we’ve seen all three of those. The biggest one this quarter that represented the largest competitive win was the latter, where we saw a competitor fail, and we were able to step in and replace them. And I think that really speaks to the strength of our balance sheet and the strength of our financials. And I think we said last quarter, Mala and I have never spoken to so many CFOs at clients and prospects, who are really kicking the tires to make sure that the partners they engage with are going to be here, not just today but into the future and be able to grow with them. The second part of your question or maybe the first part of your question was about Integrated Care margins. Mala, do you want to speak to that?

Mala Murthy: Yes. I’ll speak to that, Lisa. So if I take a step back and look at our Integrated Care margin performance in the third quarter and I look at it vis-a-vis year-over-year where as we said in our prepared remarks, we expanded by 500 basis points or even if you look at it sequentially, where we have had a pretty sizable improvement over 600 basis points in our Integrated Care margins. There are a few factors and drivers across both that stand out. First of all, it is the growth that we are seeing in our chronic care book, right? So as we’ve talked about, that has a nice pull through to gross margins and we are seeing leverage from that. We’ve also talked about the fact that in the third quarter, we saw revenue growth in a more balanced way across both chronic care and Primary360.

So we’re seeing the pull through of that revenue growth in the Integrated Care side. We are seeing the results of our cost controls and the cost efficiency programs that we have already put in place this year. We are seeing the benefit of that. And as Jason talked about in his prepared remarks, as we look at the — to an operating review across our business, certainly, we will look to additional areas where we can drive cost efficiencies. So that will be a continuing theme. Look, we also had, as we talked about in our prepared remarks, some amount of benefit. It’s about $4 million from our performance guarantees that really was about — that we recognized because of the outcomes we have driven. That was in — if you look at the overall contribution to our margin expansion, it was about 100 basis points.

So if you really look at what’s driving the margin expansion, it is the revenue mix. And it is the cost efficiency programs that we have put in place and we will continue to focus on that.

Lisa Gill: Thank you.

Operator: Thank you for your question. Next question is from the line of Ryan Daniels with William Blair. Your line is now open.

Ryan Daniels: Hey, guys, thanks for taking the question. One for you on the chronic care book of business. I think you mentioned hypertension. It’s about 30% and seeing strong growth in diabetes and weight management. So curious what your longer-term thoughts are on the impact potentially to that business either favorably or unfavorably from all the GLP-1 data that’s coming to market.

Jason Gorevic: Yes. Thanks, Ryan. As we said earlier in the year, we don’t really anticipate any material financial impact from the new program that we launched and announced earlier in the year — this year. We think that, that will have an impact for us in the future, and we expect to participate in being able to take advantage of some of the benefits of GLP-1s for people who are living with diabetes as well as for people who engage with our diabetes prevention and weight management programs. So we see that as paying off for us in the future. We also see, quite frankly, that the market is very engaged in this, and our clients are looking to us for solutions especially because of the cost of those medications. With respect to whether that’s going to be a headwind.

Yes, I would say probably the hype has gotten ahead of the reality with respect to the GLP-1s. I mean, I think I saw an analysis recently where some people said that the airlines were going to save on fuel costs when the country engages with GLP-1s and collectively loses weight. I think that gets to maybe a little bit of overhype at this point. We’ve seen the prevalence of diabetes continually increase year-over-year and is expected to increase by over 25% in the next 10 years. Well, I think that GLP-1s can have an impact on maybe moderating that rate of growth. I really don’t think and I wish it weren’t the case, but I don’t think we’re going to suddenly see a massive decline in the need for people to engage in more comprehensive solutions that include behavior change with respect to activity, with respect to nutrition, with respect to mental health care.

And so I think GLP-1s and really, we view them as a tool to enhance those programs, but don’t really see them as a headwind. And I think we also, again, going back to my initial comments, you have to take it in the context of the cost of those medications and the need for our clients to engage in programs that help manage the overall cost of them.

Ryan Daniels: Okay. That’s super helpful. I’ll hop back in the queue. Thanks so much.

Jason Gorevic: Thanks, Ryan.

Operator: Thank you for your question. The next question is from the line of Jailendra Singh with Truist. Your line is now open.

Jailendra Singh: Thank you and thanks for taking my questions. I understand we need to wait for a detailed 2024 guidance until Q4 earnings call. But I was wondering if you could give any directional color or qualitative color on revenue and margin trends or any additional puts and takes we should keep in mind across those two segments as we think about 2024 next year?

Jason Gorevic: Yes. I guess I’d say a couple of things and then I’ll hand it to Mala for some color. I think what you heard us say today is that you can expect us — you can expect to see our EBITDA grow faster than our revenue for the next couple of years. And that certainly will hold true or that’s part of our expectations for 2024. I think you heard us talk about the selling season today for Integrated Care, being in line to modestly ahead of where we were last year at this time. We have a couple of months still left in the selling season. And we see our late-stage pipeline pretty flat relative to where it was this year. So that should give you at least a little bit of color relative to where our Integrated Care segment will be.