Teladoc Health, Inc. — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Teladoc provides virtual healthcare services to clients, members and direct-to-consumer users. The quarter included a sharp rise in demand in March associated with the COVID-19 pandemic. The company reported approximately 2.0 million visits, up 92% year over year, and paid membership of 43.0 million, an increase of approximately 6.2 million from year-end 2019.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $180.8 | $128.6; up 41% (40% organic growth) |
| Subscription access revenue | $137.1; 76% of revenue | 82% of revenue in Q1 2019 |
| Visit fee revenue | $43.7; 24% of revenue | $22.6; 18% of revenue in Q1 2019 |
| Gross profit / margin | $108.4 / approximately 60.0% | $83.9 / approximately 65.3% |
| Operating loss / margin | $(21.0) / approximately (11.6)% | $(22.9) / approximately (17.8)% |
| Net loss | $(29.6); $(0.40) per diluted share | $(30.2); $(0.43) per diluted share |
| Adjusted EBITDA | $10.7 | $1.2 |
| Cash used in operating activities | $(6.3) | $(7.9) |
| Cash and cash equivalents | $508.0 at March 31, 2020 | $514.4 at December 31, 2019 |
| Cash and short-term investments | $510.8 at March 31, 2020 | |
| Convertible notes | $562.5 principal; $447.2 net carrying amount | Due 2022 and 2025 |
Total expenses rose 33% to $201.8 million. Cost of revenue increased 62% to $72.4 million, including approximately $4.0 million of COVID-related capacity expansion investments. Gross margin contracted as costs grew faster than revenue. Interest expense, net, increased 43% to $9.3 million, primarily reflecting note accretion, lower investment income and higher foreign-exchange loss.
The $10 million revolving credit facility had no borrowings outstanding; $2.2 million of letters of credit were in use. The company reported compliance with debt covenants. Operating cash outflow included working-capital movements, notably annual bonus payments. Investing cash outflow was $11.9 million, including $9.0 million prefunded for the pending InTouch acquisition; financing cash inflow was $15.1 million, largely from employee stock-option exercises.
Material changes versus the prior period
- Revenue rose $52.2 million, driven by new clients and members and increased utilization during the COVID-19 surge; MedecinDirect contributed $0.9 million.
- Visit fees nearly doubled to $43.7 million, while subscription access revenue grew 29%. Visits increased from approximately 1.1 million to 2.0 million.
- Net loss narrowed modestly, while adjusted EBITDA improved to $10.7 million from $1.2 million. Operating loss also narrowed, though cost of revenue and several operating expense categories increased.
- Foreign currency translation losses were $17.6 million, compared with $3.8 million in Q1 2019, contributing to comprehensive loss of $47.2 million.
- Cash and cash equivalents declined $6.4 million from year-end. Goodwill fell by $11.7 million, primarily due to currency translation.
Outlook, risks and unusual items
- Management expected positive adjusted EBITDA and positive free cash flow for full-year 2020, and believed existing cash and short-term investments would meet working-capital and capital-expenditure needs for at least 12 months. These are forward-looking expectations, not guarantees; no full-year numerical guidance was provided.
- The company agreed to acquire InTouch Technologies for approximately $600 million: about $150 million cash and $450 million in Teladoc stock, subject to a stock-price adjustment. Closing was expected by the end of Q2 2020. The transaction remained pending at the filing date.
- Management said it had not experienced a significant COVID-19 impact on estimates and assumptions to date, but warned that the pandemic could disrupt operations, collections, client finances and demand, and that its duration and financial effects could not be reliably predicted.
- Other disclosed risks include healthcare regulation and legal challenges, reliance on affiliated professional entities and provider availability, client concentration and retention, cybersecurity, acquisition integration, competition, and the ability to service debt. The company reported no client represented more than 10% of revenue or receivables.
- Legal matters included a securities class action, a related derivative action and a TCPA class action. Management considered the claims without merit or any potential loss immaterial, and did not expect pending litigation to have a material adverse effect.
- COVID-19 increased visit demand and prompted capacity investment, but may also heighten credit, operating and financing risks. The filing stated that workforce operations had shifted to remote work.
Most important facts for investors to verify
- Whether the COVID-related increase in visits and membership converts into sustained revenue, utilization and cash generation.
- Progress and final terms of the InTouch acquisition, including funding, stock consideration adjustments, integration costs and expected benefits.
- Whether full-year positive adjusted EBITDA and free-cash-flow expectations were achieved; Q1 operating cash flow remained negative despite positive adjusted EBITDA.
- Receivables quality and allowance adequacy as pandemic-related client and member funding pressures evolve.
- Convertible-note obligations, potential dilution and refinancing or repayment requirements, particularly the 2022 maturity.
- Exposure and developments in the disclosed litigation and regulatory matters.