Teladoc Health, Inc. — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019, compared with the same 2018 periods. Teladoc provides virtual healthcare services. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and liquidity
- Revenue: Q2 revenue was $130.3 million, up 38% year over year; first-half revenue was $258.8 million, up 41%. Management reported organic growth of 24% for Q2 and 23% for the first half. Advance Medical contributed $14.6 million and $34.8 million, respectively.
- Revenue mix and activity: Subscription access fees were 85% of Q2 revenue and 84% of first-half revenue. Paid membership rose by approximately 4.0 million from year-end 2018 to 26.8 million. Visits were approximately 908,000 in Q2 and 1.97 million in the first half.
- Profit and margins: Q2 net loss was $29.3 million ($0.41 per diluted share), versus $25.1 million ($0.40) in Q2 2018. First-half net loss was $59.5 million ($0.83 per diluted share), versus $48.9 million ($0.78). Gross margin, calculated from reported revenue and cost of revenue, was approximately 68.0% in Q2 versus 70.7%; first-half gross margin was 66.7% versus 70.4%. Operating losses were $22.0 million for Q2 and $44.9 million for the first half.
- Adjusted EBITDA: Non-GAAP Adjusted EBITDA was $6.3 million in Q2 and $7.6 million in the first half, compared with $2.7 million and $1.3 million, respectively, in 2018. The company cautions that this measure excludes items including stock-based compensation, interest, and acquisition costs.
- Cash flow: First-half operating cash use was $1.7 million, compared with $17.5 million in 2018. Investing provided $2.3 million, while financing provided $15.9 million. Cash and cash equivalents ended the period at $440.4 million.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $472.6 million; current assets were $532.6 million and current liabilities $70.4 million. Convertible notes had $562.5 million aggregate principal outstanding and a $427.2 million net carrying amount. The $10 million revolving facility had no borrowings outstanding; $1.5 million of letters of credit were in use. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected Advance Medical, new clients and members, and higher subscription fees; paid members were up 19% year over year. Advance Medical’s May 2018 acquisition makes the comparison less than fully like-for-like.
- Costs grew faster than revenue in several areas: cost of revenue rose 50% in Q2 and 58% in the first half; general and administrative expense rose 47% and 49%, respectively. Management cited provider and network costs, acquisition-related headcount, and business growth.
- Stock-based compensation increased to $17.4 million in Q2 from $11.1 million and to $30.9 million in the first half from $18.9 million. Legal and regulatory expense also increased; acquisition and integration costs declined versus 2018.
Outlook, risks and unusual items
- Management expected positive Adjusted EBITDA for full-year 2019 and said existing cash and short-term investments should meet working-capital and capital-expenditure needs for at least 12 months. No numerical revenue or GAAP earnings guidance is provided in the supplied filing text.
- Q2 included the acquisition of Paris-based MedicineDirect for $11.2 million, plus potential earnout consideration, and a $5.0 million minority investment in Vida Health. MedicineDirect’s acquisition goodwill was not tax deductible.
- The company adopted the new lease standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities of approximately $34 million at adoption; management reported no impact on operations or cash flows from adoption.
- Management highlighted risks including healthcare regulation and legal challenges, dependence on affiliated professional entities, cybersecurity, client retention, competition and technology change, international operations, provider recruitment, acquisition integration, and debt obligations. It noted seasonal patterns in enrollment and visit utilization.
- Disclosed proceedings include a securities class action, a related shareholder derivative action, and a TCPA class action against a subsidiary. Management considered the claims without merit or any potential loss immaterial and did not expect litigation to have a material adverse impact.
Key facts for investors to verify
- How much reported growth is organic and how the Advance Medical acquisition affects year-over-year comparisons.
- Whether membership, visit utilization, and subscription growth can sustain revenue expansion as cost of revenue and operating expenses rise.
- Whether positive Adjusted EBITDA translates into improved GAAP profitability and operating cash flow; review the non-GAAP reconciliation and exclusions.
- The terms, conversion features, carrying value, and maturity obligations of the $562.5 million principal amount of convertible notes.
- Developments in the disclosed litigation, regulatory matters, and acquisition earnout obligations.