Teladoc Health, Inc. (then Teladoc, Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. The company operates one reporting segment: health services.
Business context and operating performance
Teladoc provides on-demand telehealth services through subscriptions and per-visit fees. It reported more than 15 million unique members, a 34% increase in membership year over year, and approximately 439,000 visits in the first half of 2016, up from 274,000 in the comparable period. Management cited new clients and members as the main drivers of revenue growth.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $26.5 | $18.3 | $53.4 | $34.8 |
| Gross profit / margin | $19.6 / 74% | $13.5 / 74% | $38.5 / 72% | $24.7 / 71% |
| Operating loss | $(14.5) | $(16.3) | $(29.2) | $(28.8) |
| Net loss | $(14.9) | $(17.1) | $(30.2) | $(29.8) |
| Adjusted EBITDA (non-GAAP) | $(10.5) | $(14.4) | $(22.4) | $(25.1) |
- Q2 revenue grew 45%; first-half revenue grew 54%. Subscription access fees represented 81% of Q2 revenue and 79% of first-half revenue.
- Q2 visit-fee revenue was $4.9 million on 199,106 visits, versus $3.2 million on 125,322 visits. First-half visit-fee revenue was $11.1 million, up 72%.
- Basic and diluted net loss per share was $(0.38) in Q2 and $(0.78) for the first half, versus $(7.20) and $(13.13), respectively, in 2015. Weighted-average shares increased substantially following the 2015 IPO and preferred-stock conversion; the per-share comparison is therefore not directly indicative of improved profitability.
- At June 30, cash and cash equivalents were $55.8 million and short-term investments were $56.7 million. Total current assets were $127.3 million; current liabilities were $16.0 million.
- Debt totaled $31.4 million, including $4.25 million classified as current. Stockholders’ equity was $152.0 million; accumulated deficit was $160.7 million.
- First-half operating cash outflow was $28.9 million, versus $17.6 million in 2015. Investing activities provided $24.1 million, primarily reflecting net maturities of marketable securities; financing activities provided $5.5 million. Cash increased $0.7 million to $55.8 million.
Material changes versus the prior comparable period
- Revenue growth outpaced cost of revenue growth: Q2 revenue rose 45% while cost of revenue rose 44%; first-half revenue rose 54% while cost of revenue rose 47%. Gross margin was unchanged in Q2 and increased one percentage point for the first half.
- Operating loss improved by $1.8 million in Q2 but widened by $0.3 million for the first half. Lower legal expense—principally reduced Texas Medical Board litigation fees—partly offset higher marketing, sales, technology, staffing, and depreciation costs.
- First-half cash used in operations increased by $11.3 million year over year, reflecting business-growth spending and less favorable working-capital movements.
- Cash plus short-term investments were $112.5 million at June 30, compared with $137.3 million at December 31, 2015. Debt increased from $26.5 million to $31.4 million over that period.
Outlook, risks, contingencies, and unusual items
- Management anticipated negative EBITDA through the end of 2017 and stated that cash and cash equivalents were expected to cover working-capital and capital-expenditure needs for at least 12 months. The filing provides no quantified revenue or earnings guidance.
- On July 1, 2016, Teladoc acquired HealthiestYou for approximately $160 million: $45 million in cash and 6.96 million shares. Purchase accounting was still being assessed. The transaction followed the June 30 reporting date.
- On July 11, 2016, Teladoc entered into new SVB financing: a $25 million mezzanine term loan and a $25 million line of credit, plus a permitted $25 million uncommitted incremental facility. The mezzanine loan carries interest at 6.25% above WSJ Prime, subject to a 3.5% floor, and matures in July 2019. Warrants for 798,694 shares were issued at $13.50 per share. The filing does not provide a clear post-transaction debt balance.
- The Texas Medical Board appeal remained pending. Texas represented approximately 14% of first-half 2016 revenue; an adverse outcome could materially affect operations in the state. American Well appealed dismissal of its patent complaint after the quarter-end.
- The consolidated professional-entity variable interest entity reported $3.1 million of assets and $23.0 million of liabilities at June 30, 2016, a $19.9 million deficit.
- Management said a previously identified material weakness in internal financial-reporting controls had been remediated as of June 30, 2016; disclosure controls were assessed as effective. The company reported compliance with debt covenants at quarter-end.
- Other risks highlighted include healthcare regulation, dependence on affiliated professional entities, client retention, provider recruitment, technology change, and the company’s history of losses. Management also noted seasonality, with historically lower provider-network utilization in Q2.
Most important facts for investors to verify
- Whether member growth and utilization can sustain revenue growth while controlling marketing, staffing, and operating cash outflows.
- The funding, integration costs, share dilution, and expected contribution from the HealthiestYou acquisition.
- Post-July financing amounts drawn, interest and warrant costs, maturity terms, and resulting leverage and liquidity.
- Developments in the Texas Medical Board and American Well cases, including any impact on operations or legal costs.
- The assumptions behind management’s 12-month liquidity assessment and expected negative EBITDA through 2017.