Teladoc Health, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Teladoc provides virtual healthcare services and reports as one health-services segment. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Revenue | $138.0 million | $111.0 million | $396.8 million | $295.2 million |
| Operating loss | $19.9 million | $15.8 million | $64.9 million | $53.0 million |
| Net loss | $20.3 million | $23.3 million | $79.8 million | $72.2 million |
| Adjusted EBITDA (non-GAAP) | $9.0 million | $6.3 million | $16.6 million | $7.6 million |
- Q3 revenue increased 24%; nine-month revenue rose 34%. Management reported organic growth of 24% and 23%, respectively. Subscription access fees were 86% of Q3 revenue and 85% of nine-month revenue.
- Gross margin was approximately 69.0% in Q3 versus 69.2% a year earlier; for the nine months it was approximately 67.5% versus 69.9%. Operating loss widened in both comparison periods, while Q3 net loss narrowed largely alongside a higher income tax benefit.
- Q3 visits increased 45% to approximately 928,000; nine-month visits increased 63% to approximately 2.899 million. Paid membership reached 35.0 million, up approximately 12.2 million from December 31, 2018.
- Cash and cash equivalents were $475.2 million and short-term investments $15.6 million at September 30, 2019. Current assets were $558.0 million and current liabilities $85.2 million.
- Operating cash flow was positive $11.7 million for the nine months, compared with cash use of $7.3 million in 2018. Investing activities provided $15.5 million and financing activities provided $25.1 million; cash increased $52.3 million during the period.
- Convertible notes had a combined net carrying value of $433.8 million, against $562.5 million principal: $275.0 million of 3% notes due 2022 and $287.5 million of 1.375% notes due 2025. The $10 million revolving facility had no borrowings; $1.4 million of letters of credit was in use. The company reported covenant compliance.
Material changes versus the prior comparable period
- Growth reflected increased clients and members, higher visit activity, and acquisitions. MedecinDirect contributed $0.9 million of Q3 revenue; Advance Medical and MedecinDirect contributed $37.2 million for the nine-month period.
- For the nine months, cost of revenue rose 46%, faster than revenue growth of 34%. Advertising and marketing rose 37%, and general and administrative expense rose 41%, including increased staffing and acquisition-related effects.
- Adjusted EBITDA improved, but GAAP operating loss increased. Stock-based compensation was $48.2 million for the nine months, versus $31.1 million in 2018.
- Operating lease accounting adoption added right-of-use assets and lease liabilities; the company reported no impact on operating results or cash flows from adoption.
Outlook, commentary, risks and unusual items
- Management anticipated positive Adjusted EBITDA for full-year 2019 and stated existing cash and short-term investments were expected to cover working capital and capital expenditure needs for at least 12 months. The filing does not provide a revenue or GAAP earnings forecast.
- Management cited membership growth, visit utilization, client renewals, product development and market acceptance as factors affecting performance. Results are seasonal, with typically higher utilization in the first and fourth quarters.
- The nine-month 2019 tax benefit included an $8.1 million benefit related to an anticipated intercompany transfer and a partial release of the deferred-tax valuation allowance; the reported net tax benefit was $6.5 million.
- Risks include healthcare regulation and legal challenges to the business model, dependence on affiliated professional entities, cybersecurity, client retention, provider recruitment, competition, international operations, acquisition integration and debt obligations.
- Disclosed litigation included a securities class action, a related stockholder derivative action and a TCPA fax class action involving a subsidiary. Management said it did not expect litigation to have a material adverse impact; the potential TCPA loss was described as immaterial.
- On October 29, 2019, the company amended executive employment and severance agreements, including provisions concerning compensation recovery, “Cause” and “Good Reason.”
Important facts for investors to verify
- How much reported growth is sustained organically, and how acquisition contributions and integration affect margins.
- Whether positive Adjusted EBITDA translates into durable GAAP improvement and operating cash generation; review the effects of stock-based compensation and other excluded items.
- The sustainability of the tax benefit and the company’s deferred-tax valuation allowance assumptions.
- Convertible-note maturity, conversion and dilution exposure, and the fair-value estimates: disclosed fair values exceeded the notes’ net carrying values.
- Developments in the disclosed lawsuits and regulatory matters, and any changes to management’s liquidity outlook or risk disclosures.