Teladoc, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. Teladoc provides telehealth services, primarily through recurring per-member subscription fees and fees for completed visits.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $44.6 | $26.5 | $87.5 | $53.4 |
| Gross profit / margin | $34.6 / 77% | $19.6 / 74% | $65.3 / 75% | $38.5 / 72% |
| Operating loss | $(14.5) | $(14.5) | $(29.3) | $(29.2) |
| Net loss | $(15.4) | $(14.9) | $(31.1) | $(30.2) |
| Adjusted EBITDA (non-GAAP) | $(5.1) | $(10.5) | $(14.2) | $(22.4) |
- Q2 revenue grew 68%; first-half revenue grew 64%. Management attributed growth chiefly to new clients and members, with the HealthiestYou acquisition also contributing to the comparison.
- Membership was up approximately 33% year over year; visits were approximately 309,000 in Q2 and 694,000 in the first half, versus 199,000 and 439,000, respectively, in 2016.
- Subscription access fees accounted for 84% of Q2 revenue and 82% of first-half revenue. Advertising and marketing, technology and development, sales, and general and administrative expenses all increased year over year. Legal expense declined.
- Basic and diluted net loss per share was $0.28 in Q2 and $0.58 for the first half, compared with $0.38 and $0.78 in 2016.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $409.2 million and short-term marketable securities were $31.1 million. Current assets were $457.0 million against current liabilities of $19.7 million.
- First-half operating cash use was $15.4 million, compared with $28.9 million in 2016. Investing activities used $16.9 million; financing activities provided $391.5 million, principally from the convertible notes and January stock offering.
- At June 30, bank and other debt was $42.4 million and convertible notes had a net carrying amount of $201.4 million. The notes have $275 million principal, bear 3% cash interest, mature in December 2022, and have an initial conversion price of approximately $44 per share. The reported effective interest rate on the liability component was 10%.
- After quarter-end, Teladoc repaid the SVB facilities, acquired Best Doctors for $440 million (including $375 million cash and approximately $65 million in stock), and entered new secured facilities: a $175 million term loan and a $10 million revolving facility. Management estimated cash and cash equivalents would exceed $150 million at July 31.
Changes, outlook and risks
- Gross margin improved by 3 percentage points in both the quarter and first half. Net losses were modestly higher, while Adjusted EBITDA losses narrowed.
- Management expected negative Adjusted EBITDA for 2017 and said available cash was expected to cover working capital and capital expenditure needs for at least 12 months. No revenue or earnings forecast was provided.
- Management expects continued investment in marketing, sales, technology and operations; results are seasonal, with historically lower visit utilization in Q2 and stronger revenue increases in Q4 and Q1.
- The pending Texas Medical Board litigation concerns rules that could require an in-person examination before prescribing controlled substances. The case was stayed through September 1, 2017, with no trial date set. Texas generated approximately 10% of first-half 2017 revenue; an adverse regulatory outcome could materially affect operations there.
- Other stated risks include healthcare regulation and legal challenges, reliance on affiliated professional entities, client retention, provider recruitment, technology change and the company’s history of losses. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Investor verification checklist
- Review the Best Doctors purchase accounting, integration costs and post-acquisition operating contribution when reported.
- Verify post-acquisition cash, total debt, interest costs and the terms and covenants of the new secured credit facilities.
- Track member growth, visit utilization, subscription-versus-visit revenue mix, gross margin and cash burn.
- Monitor the Texas Medical Board case and developments in state telehealth regulation.
- Assess the trajectory of stock-based compensation and the limitations of management’s non-GAAP Adjusted EBITDA measure.