Teladoc Health, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. The filing was signed May 1, 2018. Amounts below are in U.S. dollars.
Business context
Teladoc provides virtual healthcare services through subscription access and visit-based contracts. The July 2017 acquisition of Best Doctors expanded the company’s expert medical consultation services and materially affects year-over-year comparisons. Teladoc reported approximately 606,000 visits in Q1 2018, up from approximately 385,000; U.S. paid membership was 20.8 million, versus 14.8 million in the prior-year period (as adjusted for Aetna and Amerigroup lives). An additional 9.5 million people had visit-fee-only access.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $89.6 million | $42.9 million |
| Gross profit / gross margin | $62.8 million / 70% | $30.8 million / 72% |
| Operating loss | $(19.1) million | $(14.8) million |
| Net loss | $(23.9) million | $(15.7) million |
| Net loss per diluted share | $(0.39) | $(0.30) |
| Adjusted EBITDA (non-GAAP) | $(1.4) million | $(9.1) million |
| Cash used in operating activities | $(13.9) million | $(12.5) million |
Revenue increased 109%; management reported organic growth of 47%, excluding Best Doctors. Subscription access fees were about 80% of revenue in both periods. Cost of revenue rose 121%, faster than revenue, and gross margin declined two percentage points.
At March 31, 2018, cash and cash equivalents were $65.2 million and short-term investments were $54.6 million, totaling $119.7 million. Current assets were $156.9 million and current liabilities $37.8 million. Total assets were $817.5 million. The company reported $275 million principal amount of 3% convertible senior notes due 2022, carried at $210.4 million net of unamortized discount and issuance costs; their estimated fair value was approximately $327 million. No term-loan or revolving-credit borrowings were outstanding, and the company said it was in compliance with debt covenants.
Changes versus the prior period
- Best Doctors contributed $26.8 million of Q1 2018 revenue and $8.5 million of cost of revenue; international revenue was $10.9 million, compared with none in Q1 2017.
- Visit revenue increased to $17.9 million from $8.5 million, alongside the increase in visits. Paid membership grew 41% year over year.
- Operating expenses rose across marketing, sales, technology and development, and general and administrative functions, reflecting business growth, the acquisition, and increased staffing. Depreciation and amortization rose to $8.3 million from $2.6 million.
- Net interest expense increased to $4.9 million from $0.7 million, primarily reflecting the convertible notes. Stock-based compensation increased to $7.8 million from $3.1 million.
- Operating cash use increased to $13.9 million from $12.5 million. Investing activities provided $24.0 million, mainly from $25.0 million of marketable-security maturities; financing activities provided $12.2 million, mainly from employee option exercises and related tax-withholding cash.
Outlook, risks and unusual items
- Management anticipated positive Adjusted EBITDA for 2018 and stated existing cash and short-term investments should cover working-capital and capital-expenditure needs for at least 12 months. The filing provides no specific revenue or GAAP earnings guidance.
- Management expected continued investment in marketing, sales, technology and development, and general and administrative functions. It also noted that gross profit may fluctuate and expected annual gross profit to decrease over the next several years.
- A $1.5 million Boston facility lease-abandonment charge was recorded in acquisition and integration costs. The company also issued approximately $1.2 million in member refunds during the quarter.
- Key disclosed risks include healthcare regulation and legal challenges to the business model, dependence on affiliated professional entities and qualified providers, cybersecurity and privacy exposure, client and membership retention, international-market requirements, acquisition integration, competition, and indebtedness. The filing reported no material pending legal proceeding and no material change to the risk factors in the 2017 Form 10-K.
- A material weakness concerning accounting for certain nonstandard stock-based awards identified in 2017 was reported as remediated at March 31, 2018; management concluded disclosure controls were effective at the reasonable-assurance level.
- The company adopted Topic 606 using the modified retrospective method; management reported no impact on its financial statements. It was evaluating the impact of the new lease accounting standard, effective for the company in Q1 2019.
Investor verification points
- Confirm how much of reported growth and future performance is attributable to Best Doctors versus organic growth, and how acquisition integration is progressing.
- Track membership, visit volume and utilization alongside subscription and visit-fee revenue, cost growth, and gross margin.
- Assess the sustainability of improving Adjusted EBITDA against continued GAAP losses, stock-based compensation, and operating cash burn; review the company’s non-GAAP reconciliation and exclusions.
- Review liquidity and cash needs against the $275 million 2022 notes, their conversion terms, and contractual lease and interest commitments.
- Monitor regulatory, professional-entity, cybersecurity, client-retention and international risks, as well as the ongoing effectiveness of remediated stock-compensation controls.