Teladoc Health, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial amounts below are in U.S. dollars; millions are abbreviated as “m” unless noted. The filing was signed November 6, 2020.
Business context
Teladoc provides virtual healthcare services, including member access to provider networks, paid visits, and hosted telehealth platforms. Results reflect strong demand during the COVID-19 pandemic and the July 1 acquisition of InTouch Technologies, a provider of enterprise telehealth solutions. Teladoc’s merger with Livongo closed after quarter-end, on October 30, 2020.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $288.8m | $138.0m | $710.6m | $396.8m |
| Gross profit / gross margin | $184.1m / 63.7% | $95.2m / 69.0% | $442.8m / 62.3% | $267.7m / 67.5% |
| Operating loss | $(19.7)m | $(19.9)m | $(47.9)m | $(64.9)m |
| Net loss | $(35.9)m | $(20.3)m | $(91.2)m | $(79.8)m |
| Diluted loss per share | $(0.43) | $(0.28) | $(1.17) | $(1.11) |
| Adjusted EBITDA (non-GAAP) | $39.5m | $9.0m | $76.5m | $16.6m |
- Revenue increased 109% in Q3 and 79% year to date. Management attributed growth to new clients and members, pandemic-related demand, and InTouch; it reported organic growth of approximately 90% for Q3 and 73% for the nine-month period.
- Q3 revenue mix was 78% access fees, 18% visit fees, and 4% other. Visits rose 206% year over year to approximately 2.8m in Q3; nine-month visits increased 164% to approximately 7.6m. Paid membership reached 51.5m, up approximately 14.8m from year-end 2019.
- Cost of revenue grew faster than revenue, reducing gross margin. Operating expenses included $25.4m of acquisition and integration costs in Q3. Higher interest expense and debt-extinguishment charges contributed to the wider Q3 net loss.
- For the first nine months, operating cash flow was $61.4m, investing cash flow was $(177.1)m, and financing cash flow was $788.7m. Financing included $975.9m net proceeds from the 2027 notes, partly offset by $228.2m used to exchange 2022 notes. Cash and cash equivalents increased to $1,187.3m from $514.4m at year-end 2019.
- At September 30, cash and short-term investments totaled approximately $1,190.4m; current assets were $1,310.0m and current liabilities $200.8m. Convertible notes had $953.5m net carrying value; aggregate principal outstanding was $1,324.3m. The $10m revolving credit facility was terminated in July, with no amount outstanding at year-end 2019.
Material changes and unusual items
- InTouch was acquired for approximately $1.08bn, comprising about $918.8m in Teladoc shares and $160.7m cash, net of cash acquired. The preliminary allocation included $937.5m of goodwill. InTouch contributed approximately $24.9m of revenue in Q3; the filing’s MD&A reports $26.1m for the nine-month period.
- In May, Teladoc issued $1bn of 1.25% convertible notes due 2027 and exchanged approximately $228.2m principal amount of 2022 notes for cash and shares. The company recorded $9.0m of debt-extinguishment loss year to date.
- The Livongo merger closed October 30, 2020. Livongo shareholders received 0.5920 Teladoc shares and $4.24 cash per share; Livongo also paid a $7.09 per-share special dividend. Teladoc reported merger consideration of approximately $12.85bn, including $432.9m cash and 60.4m Teladoc shares. Teladoc guaranteed $550m of Livongo 0.875% convertible notes due 2025.
Outlook, commentary, and risks
- Management expected positive Adjusted EBITDA and positive free cash flow for full-year 2020 and stated existing cash and short-term investments should cover working capital and capital expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided.
- Management said pandemic-driven demand continued through Q3 but could alter usual seasonal utilization patterns. The company stated it could not reliably predict the duration or magnitude of COVID-19 effects and that financial forecasts were difficult to assess.
- Risks highlighted include integration costs and execution for Livongo and InTouch, failure to realize merger synergies, possible client or employee disruption, healthcare regulation and legal challenges, cybersecurity, provider retention, competition, and the company’s history of losses and indebtedness.
- Disclosed matters included securities and derivative litigation, a TCPA class action the company considered immaterial, and Livongo merger-related lawsuits. The company said it did not expect existing litigation to have a material adverse effect; certain merger complaints had been dismissed by November 5, 2020.
- Management reported effective disclosure controls as of September 30, 2020 and no material quarter change in internal control over financial reporting. It also said COVID-19 had not significantly affected its accounting estimates to date, while continuing to monitor collectability of receivables.
Important facts for investors to verify
- How much of revenue and visit growth is sustained after pandemic-related demand changes, and how margins evolve as cost of care and member utilization change.
- Whether InTouch and Livongo integration delivers expected strategic benefits, and the eventual purchase accounting and integration costs for the Livongo transaction.
- Post-merger cash, debt, share count, and dilution, including the Livongo notes guarantee and conversion terms; Q3 balance-sheet figures predate the Livongo closing.
- The reconciliation and exclusions in Adjusted EBITDA and free-cash-flow expectations; both are non-GAAP measures, and full-year outcomes were forward-looking at filing time.
- Developments in litigation, regulatory requirements, COVID-19 effects on clients and collections, and the company’s ability to service and manage its convertible debt.