Teladoc Health, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Teladoc provides telehealth and medical-expert services. The July 14, 2017 acquisition of Best Doctors materially expanded the business and affects year-over-year comparisons.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $68.7 million | $32.4 million | $156.1 million | $85.8 million |
| Gross profit | $51.9 million | $25.3 million | $117.2 million | $63.8 million |
| Gross margin | 76% | 78% | 75% | 74% |
| Operating loss | $(21.5) million | $(20.3) million | $(50.8) million | $(49.4) million |
| Net loss | $(31.3) million | $(29.8) million | $(62.4) million | $(60.0) million |
| Adjusted EBITDA loss (non-GAAP) | $(0.6) million | $(9.3) million | $(14.9) million | $(31.7) million |
| Operating cash flow | Not provided for quarter | $(27.2) million | $(44.3) million |
Q3 revenue rose 112%; the company reported 45% organic growth excluding Best Doctors. Nine-month revenue increased 82%, with reported organic growth of 57% excluding Best Doctors. Best Doctors contributed $21.8 million of revenue after acquisition. Paid membership increased 33% year over year; reported total membership growth of about 5.6 million included approximately 2.8 million members from Best Doctors. Visits were approximately 306,000 in Q3 versus 203,000, and approximately 1.0 million for the nine months versus 642,000.
Subscription access fees represented 87% of Q3 revenue and 84% of nine-month revenue. Q3 visit fees were $8.9 million, including $6.8 million from general medical visits and $2.1 million from specialty visits, primarily expert second opinions.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $83.1 million and short-term marketable securities were $89.8 million, totaling $172.9 million in cash and near-cash investments. Current assets were $207.4 million and current liabilities $40.8 million.
- Net cash used in operations was $27.2 million for the first nine months; investing used $456.7 million, principally the $379.4 million net cash acquisition cost for Best Doctors; financing provided $516.9 million. Cash ended the period at $83.1 million.
- Debt included a $175 million senior secured term loan, carried at $166.9 million net of discount, and $275 million principal of 3% convertible notes due 2022, carried at $204.4 million net of discount. The secured term loan bears 8.49% interest at the stated rate and matures in July 2022. A $10 million secured revolving facility matures in July 2020; the filing does not report a drawn balance at period-end.
- The company said cash and short-term investments should fund working capital and capital expenditure needs for at least 12 months. It was in compliance with debt covenants at September 30, 2017.
Material changes and unusual items
- Best Doctors was acquired for $445.5 million of aggregate consideration, comprising $379.4 million cash net of cash acquired and $66.2 million in Teladoc shares. The acquisition added $307.5 million of goodwill; total goodwill rose to $498.5 million and net intangible assets to $164.6 million.
- Teladoc issued $275 million of 3% convertible notes in June, receiving $263.7 million net proceeds, and raised $123.9 million net in a January follow-on equity offering. It also entered into the new secured credit facilities and repaid prior SVB debt. The notes’ initial conversion price was approximately $44 per share.
- Q3 operating expenses increased substantially, including advertising and marketing (+58%), sales (+49%), technology and development (+70%), general and administrative (+78%), and depreciation and amortization (+146%) year over year. Management attributed increases to growth investments and the Best Doctors acquisition. Acquisition and integration costs were $8.5 million in Q3 and $10.6 million for the nine months.
- Net interest expense rose to $8.2 million in Q3 and $9.7 million for the nine months, reflecting higher debt and financing costs. The nine-month period included $1.5 million of debt-extinguishment charges; the comparable 2016 period included $8.5 million of warrant amortization and debt-extinguishment charges.
Outlook, risks and contingencies
Management anticipated negative Adjusted EBITDA for full-year 2017 and expected to continue investing in marketing, sales, technology and business growth. It noted that future capital needs depend on growth, renewals, utilization and investment plans, and that additional financing may be needed; availability and terms are uncertain. Results are subject to seasonality, with utilization typically higher in the first and fourth quarters.
The company’s lawsuit challenging Texas Medical Board rules remained pending. The challenged rule would require an in-person examination before prescribing controlled substances in Texas; its effectiveness was enjoined pending trial, and proceedings were stayed through November 30, 2017 with no trial date set. Texas represented about 8% of nine-month 2017 revenue. The filing warns that an adverse outcome, if Teladoc cannot adapt, could materially affect its Texas business.
Other stated risks include healthcare regulation and legal challenges, dependence on affiliated professional entities and provider networks, client retention and utilization, competition and technology change, and increasing regulatory, privacy, currency and operational risks as international operations expand. The company reported no other material legal proceeding and did not believe reasonably possible losses above recorded accruals would be material. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic growth, member additions and visit utilization persist after separating Best Doctors’ contribution and acquisition-related effects.
- Integration progress and the realization of expected benefits from Best Doctors, including the scale of goodwill and acquired intangible assets.
- Cash burn, financing requirements and the company’s ability to meet debt service and contractual commitments while pursuing growth; verify revolver availability and applicable loan terms.
- Texas Medical Board litigation status and any changes to telehealth prescribing rules, as well as the effect of expanding international compliance obligations.
- How GAAP losses and cash flows compare with non-GAAP Adjusted EBITDA, including the recurring nature of stock compensation, acquisition costs and elevated interest expense.