Teladoc Health, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. Teladoc operated as a single health-services segment and generated revenue from recurring subscription access fees and completed-visit fees.
Business context and operating performance
Teladoc described itself as a telehealth platform serving more than 11 million unique members, with over 1,100 physicians and behavioral health professionals. It completed approximately 274,000 visits in the first half of 2015, versus approximately 127,000 in the comparable 2014 period. Membership increased 39% year over year; management reported average annual net dollar retention of 104% over the prior three years.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $18.3m | $10.3m | $34.8m | $19.7m |
| Gross profit | $13.5m | $8.3m | $24.7m | $15.7m |
| Gross margin | 74% | 80% | 71% | 80% |
| Operating loss | $(16.3)m | $(2.9)m | $(28.8)m | $(5.0)m |
| Net loss | $(17.1)m | $(3.2)m | $(29.8)m | $(5.5)m |
| Operating cash flow | Not provided quarterly | $(17.6)m | $(5.1)m | |
| Cash and cash equivalents at June 30 | $15.4m | — | ||
| Total bank and other debt at June 30 | $32.7m | — |
Q2 revenue grew 78% year over year and first-half revenue grew 77%. Subscription access fees represented 83% of Q2 revenue and 81% of first-half revenue. GAAP diluted loss per share was $7.20 for Q2 and $13.13 for the first half; pro forma loss per share reflecting the IPO and preferred-stock conversion was $0.46 and $0.80, respectively.
First-half investing cash outflow was $17.9m, primarily for acquisitions, property and equipment, and capitalized software. Financing cash inflow was $4.4m. At June 30, current assets were $30.1m and current liabilities were $26.1m.
Changes versus prior comparable periods
- Revenue growth reflected new clients and members, acquired businesses, and higher visit volume. Q2 visits rose to 148,696 from 61,379; first-half visits rose to 274,018 from 126,622.
- Gross margin declined, which management attributed in part to a higher mix of visit-fee revenue and related provider costs. Cost of revenue grew faster than revenue.
- Operating expenses increased substantially, especially general and administrative expense: $16.5m in Q2 versus $4.0m a year earlier, and $28.5m for the first half versus $7.4m. Higher legal and other professional fees, headcount, member-service operations, bad debt, severance, and facility-abandonment costs contributed.
- Cash used in operations increased to $17.6m from $5.1m for the first half, reflecting larger losses and increased investment in staffing, marketing, technology, network operations, and legal matters.
- Comparability is affected by acquisitions: AmeriDoc was acquired in May 2014, BetterHelp in January 2015, and StatDoc in June 2015. The filing also presents acquisition-adjusted pro forma results, which are not the reported GAAP results.
Outlook, financing, and material items
- Management expected negative EBITDA through the end of 2017 and stated that cash, including the subsequent IPO proceeds, should cover working-capital and capital-expenditure needs for at least 12 months. No revenue or earnings guidance was provided.
- On July 7, 2015, after quarter-end, Teladoc completed its IPO at $19 per share, selling 9,487,500 shares and receiving $163.5m net proceeds. Preferred stock converted into approximately 25.5m common shares. On July 15, the company repaid $5.0m on its revolving facility.
- June 30 debt included a $11.5m revolving advance, $4.8m term loan, $13.0m mezzanine loan (net carrying value $12.9m), and $3.5m AmeriDoc note. The mezzanine loan and AmeriDoc note carried 10% interest; the company reported compliance with debt covenants.
- Acquisitions included StatDoc for $30.1m, partly funded with $16.8m of Teladoc stock, and BetterHelp, which included a revenue-based earn-out. Goodwill rose to $56.3m; the carrying value and fair value of contingent consideration were subject to estimation.
- Texas Medical Board rules restricting remote prescribing were being challenged in court. Teladoc had preliminary injunctions in place, but litigation remained unresolved. Texas represented 18% of first-half 2015 revenue; management could not estimate potential loss, but did not consider a material loss probable.
- American Well filed a patent-infringement action in June 2015; Teladoc was seeking inter partes review of the asserted patent. The filing warns that litigation could be costly and outcomes uncertain.
- Disclosure controls were deemed ineffective at June 30 because of an unremediated material weakness related to insufficient accounting personnel. Management was taking remediation steps.
- Other unusual costs included $0.7m of first-half lease-abandonment charges. Management cited a full valuation allowance against deferred tax assets and approximately $91.9m of federal net operating losses available, subject to possible limitations.
Important facts for investors to verify
- Whether the Texas Medical Board litigation or other state telehealth rules alter Teladoc’s ability to prescribe or operate, especially in Texas.
- Whether the company remediates its material weakness and establishes effective financial-reporting controls.
- Whether revenue and member growth can translate into improved margins and reduced cash burn, given management’s expectation of negative EBITDA through 2017.
- Debt repayment, interest costs, covenant terms, and use of IPO proceeds; the June 30 balance sheet predates the IPO and subsequent $5.0m repayment.
- Acquisition integration, earn-out obligations, goodwill and intangible-asset valuations, and the effect of acquired businesses on reported growth.
- Potential outcomes and costs of the American Well patent case and other litigation, including any losses not accrued.