Teladoc Health, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Teladoc operates a telehealth platform with recurring per-member subscription fees and visit fees. It reported more than 20 million members, approximately 385,000 visits in the quarter, and membership growth of 34% year over year. The July 2016 HealthiestYou acquisition is included in 2017 results but not the comparable 2016 period.
Financial highlights
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $42.9 million | $26.9 million; up 60% |
| Subscription / visit revenue mix | 80% / 20% | 77% / 23% |
| Visits and visit fees | Approximately 385,000; $8.6 million | Approximately 240,000; $6.2 million |
| Gross profit / margin | $30.8 million / 72% | $18.9 million / 70% |
| Operating loss | $(14.8) million | $(14.7) million |
| Net loss / diluted loss per share | $(15.7) million / $(0.30) | $(15.3) million / $(0.40) |
| Adjusted EBITDA (non-GAAP) | $(9.1) million | $(11.9) million |
| Cash used in operations | $(12.5) million | $(17.2) million |
Revenue growth reflected new clients and members, higher subscription fees, increased visits, and HealthiestYou. Cost of revenue rose 53%, slower than revenue, and gross margin improved by 2 percentage points. Operating expenses increased in marketing (57%), sales (52%), technology and development (25%), and general and administrative (25%); legal expense fell 69%. Higher depreciation and amortization and interest expense also weighed on results.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $139.9 million and short-term marketable securities were $36.0 million. Cash and securities together totaled approximately $176.0 million.
- Long-term bank and other debt was $42.4 million; the company repaid the remaining $2.0 million subordinated note during Q1. It reported compliance with debt covenants.
- Operating cash outflow was $12.5 million. Investing used $21.0 million, primarily reflecting net purchases of marketable securities. Financing provided $123.4 million, principally from the January follow-on offering.
- The January offering generated $123.9 million of net proceeds. Management said existing cash and cash equivalents should cover working capital and capital expenditure needs for at least 12 months.
Outlook, risks and other notable items
- Management anticipated negative Adjusted EBITDA through year-end 2017; no specific revenue or earnings guidance was provided. It cited growth, renewals, visit volume, product development, sales and marketing investment, and market acceptance as factors affecting future capital needs.
- A Texas Medical Board dispute concerns a rule that could require an in-person examination before prescribing controlled substances. The rule’s effectiveness remained enjoined; the case was stayed through September 1, 2017, with no trial date set. Texas generated approximately 10% of Q1 revenue. If the rule takes effect and Teladoc cannot adapt, its Texas business could be materially affected.
- Other cited risks include healthcare regulation, dependence on affiliated professional entities, retaining clients and providers, and the company’s history of losses. The company had an accumulated deficit of $220.4 million.
- HealthiestYou was acquired in July 2016 for approximately $151.5 million in cash and stock; goodwill was $131.8 million. This affects year-over-year comparability.
- Q1 included the follow-on stock offering and adoption of a stock-compensation accounting standard. Stock-based compensation expense was $3.1 million, versus $1.3 million a year earlier. Management reported effective disclosure controls and no material internal-control changes during the quarter.
Important facts for investors to verify
- Progress and potential outcomes of the Texas Medical Board litigation and any changes to state telehealth rules.
- Whether membership growth, client renewals and visit utilization support durable revenue growth and improving margins.
- Cash burn, the path toward management’s expected negative Adjusted EBITDA through 2017, and the adequacy of liquidity under different growth or spending scenarios.
- Debt terms, variable-rate exposure, covenant compliance, and the dilution and use of proceeds associated with equity financing.
- HealthiestYou’s contribution to growth and performance relative to acquisition-related goodwill and amortization.