Teladoc Health, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; amounts below are in U.S. dollars.
Business context
Teladoc provides virtual healthcare services. It completed the Advance Medical acquisition on May 31, 2018, expanding its international virtual-care and expert-medical services. The company reported one operating segment. It completed approximately 641,000 visits in Q3 and 1.78 million in the first nine months of 2018. U.S. paid membership was 22.6 million at September 30, versus 19.1 million a year earlier (2017 figure adjusted for 3.5 million Aetna lives).
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $111.0m | $68.7m | $295.2m | $156.1m |
| Gross profit | $76.8m | $51.9m | $206.5m | $117.2m |
| Gross margin | 69% | 76% | 70% | 75% |
| Operating loss | $(15.8)m | $(21.5)m | $(53.0)m | $(50.8)m |
| Net loss | $(23.3)m | $(31.3)m | $(72.2)m | $(62.4)m |
| Adjusted EBITDA (non-GAAP) | $6.3m | $(0.6)m | $7.6m | $(14.9)m |
| Operating cash flow | Not reported by quarter | $(7.3)m | $(27.2)m |
Q3 revenue grew 62%; nine-month revenue grew 89%. Management reported organic growth of 29% and 37%, respectively, excluding the impact of the Advance Medical and Best Doctors acquisitions. Higher revenue reflected acquired businesses, more clients and members, and greater visit activity. Gross margin fell, which management attributed to product mix. Nine-month net loss widened despite higher revenue, with increased operating costs and interest expense among the drivers. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, stock compensation, acquisition costs and gains on asset sales.
Financial position, liquidity and debt
- Cash and cash equivalents were $457.6m and short-term investments were $15.0m at September 30, 2018, versus cash of $42.8m and short-term investments of $79.5m at year-end 2017.
- Total current assets were $523.3m and current liabilities $58.2m. Total assets were $1.535bn; stockholders’ equity was $1.028bn.
- Cash used in investing activities was $215.1m, primarily reflecting the Advance Medical acquisition; financing provided $638.2m, including $330.9m net proceeds from a July stock offering and $279.1m net proceeds from convertible notes.
- Convertible notes had $562.5m aggregate principal: $275.0m of 3% notes due 2022 and $287.5m of 1.375% notes due 2025. Their combined net carrying amount was $408.7m after discounts. The $10m revolving facility had no borrowings; the company said it was in compliance with debt covenants.
Material changes and unusual items
- Advance Medical was acquired for $351.7m net of cash acquired, including $291.9m cash and $68.6m in Teladoc shares. It contributed $19.2m revenue in Q3 and $25.4m for the nine-month period.
- The July 2018 public offering issued 5.0 million shares and raised $330.9m net. Shares outstanding increased to 70.0 million at September 30, from 61.5 million at December 31, 2017.
- Teladoc sold certain client contracts/assets for $5.5m and recorded a $5.5m gain for the nine months, including $1.4m in Q3 after related contingencies were settled.
- Stock-based compensation was $31.1m for the first nine months, versus $13.6m a year earlier. Depreciation and amortization rose to $26.0m from $11.7m, primarily reflecting acquisitions.
Outlook, risks and contingencies
Management anticipated positive Adjusted EBITDA for 2018 and stated that cash and short-term investments should fund working capital and capital expenditures for at least the next 12 months. The filing gives no specific revenue or earnings guidance. Future capital needs depend on growth, utilization, product development, sales and marketing, and potential acquisitions; additional financing may be needed and might not be available on acceptable terms.
Disclosed risks include healthcare regulation and legal challenges to the business model, dependence on affiliated professional entities, cybersecurity, client retention, provider recruitment, international-market complexity, competition and technology change, acquisition integration, and debt obligations. The company reported no material legal proceeding and no material change to previously disclosed risk factors. It noted seasonality, with stronger utilization typically in the first and fourth quarters. Management said disclosure controls were effective and a previously identified stock-compensation control weakness had been remediated by March 31, 2018.
Important facts for investors to verify
- How much reported growth reflects organic performance versus acquisitions, and whether the lower gross margin persists as service mix changes.
- Whether visit growth, paid-member growth and client renewals support continued revenue growth and the stated 2018 Adjusted EBITDA outlook.
- The cash-cost, integration progress and realized benefits of Advance Medical; goodwill and acquired intangible assets increased materially.
- The dilution from equity issuance and stock compensation, and the potential conversion terms and economic cost of the convertible notes.
- Whether operating cash use, acquisition and capital spending, and liquidity remain consistent with management’s stated funding outlook.