Teladoc Health, Inc. (TDOC) Cowen 43rd Annual Healthcare Conference Transcript

Teladoc Health, Inc. (NYSE:TDOC) Cowen 43rd Annual Healthcare Conference March 6, 2023 12:50 PM ET

Company Participants

Patrick Feeley - Head, Investor Relations

Mala Murthy - Chief Financial Officer

Conference Call Participants

Charles Rhyee - Cowen

Charles Rhyee

All right. We'll get started and I appreciate everyone jumping in here for the first session after lunch and we're very pleased to have with us Teladoc Health, and speaking for the company is Mala Murthy, Chief Financial Officer and Patrick Feeley, Senior Vice President, Investor Relations. Thank you both for joining us.

Patrick Feeley

Thanks for having us.

Mala Murthy

Good to be back in person.

Charles Rhyee

Yes, absolutely.

Patrick Feeley

I have to say its impressive too, all the logos have been already to TD.

Charles Rhyee

Yes.

Patrick Feeley

Like how many days has it been?

Charles Rhyee

Four.

Mala Murthy

Four days.

Patrick Feeley

Yes, that's very impressive.

Charles Rhyee

There was definitely an alternate set.

Patrick Feeley

I can imagine.

Charles Rhyee

And there's a little bit of debate on the timing, but yes, everything came through. I guess really to jump right in, 4Q results were actually good relative to your expectations and I think one of the messages that kind of came out of it was talking about shifting sort of the focus more towards profitability, balancing that with growth. Can you walk us through sort of what went into decision making there and the benefits you see it provide moving forward?

Mala Murthy

Yes, so we've really been talking about balancing revenue growth with profitability I would say back half of last year. Can you all hear me?

Charles Rhyee

Can we turn up the middle mic?

Mala Murthy

So we've really been talking about it since the back half of last year. And when we talk about sort of revenue growth versus profitability, it's not that we are saying we will focus on profitability to the exclusion of revenue growth. What we are saying is that we will balance the two. And what went into the considerations is, look, Teladoc Health, as you all know, has been coming off a period of high growth, hyper growth, especially if you look at BetterHelp, one of the segments that we talked about recently has been growing very strongly over the past few years.

We are certainly going to manage and balance margin progression across the board, but also in BetterHelp this year as our guidance reflects. It took a little bit of a backward trajectory in 2022 and we are, as our guidance suggested looking to expand our margins in BetterHelp. And for us, balancing margin expansion with revenue growth also means that we are taking the right steps to right-size our cost structure relative to our revenue growth outlook. And Charles, you know, the market has changed. It's a different environment that we are operating in and we believe that this is the right approach for the environment we're in.

Charles Rhyee

That's helpful. And you just touched on it a little bit on. You know, one of the questions that we're getting is on the margin progression. You touched on it during 3Q and 4Q a little bit. Can you dive into why the BetterHelp business sees such a margin ramp throughout the year?

Mala Murthy

Yes. I'll start and then Patrick can absolutely add. I'm glad you asked the question because frankly, we've been getting a ton of questions on that since our earnings call. So it's a good opportunity for us to reinforce the margin progression. So in BetterHelp, what we see this year, similar to what we saw in 2022, is essentially coming back to the normal seasonality. That has always been part of this business.

If you look at the seasonality in this business pre-2020 pre-COVID it's essentially reverting back to that type of seasonality dynamic, I would view 2020 and 2021 as more unusual years for COVID. So what is that seasonality? Let's start with Q4. So typically in Q4 in this business, we essentially chop it back, pull back in ad spend. The reason we do that is for a couple of dynamics going on.

One, holiday pricing is more expensive; and two, it's the time of the year where consumers are thinking about the holidays, less about getting therapy service and mental health services. So conversion is just a little bit more inefficient at that time. Also what happens in Q4 is you get the pullback in ad spend, and so you have the help on costs, but the revenue impact of that lags. So that is the combination of the two is what gets us to stronger margins very typically in Q4.

Pulling back on ad spend though means as we exit the year there's fewer member acquisitions and that has an impact on revenue in 1Q, which is why you will find 1Q to be sequentially weaker typically in revenue growth and also 1Q we are ramping up ad spend as we sort of build the book up, book of business up for the year. So you take it out of that and so 1Q typically ends up being weaker in margin and revenue growth. So that's a little bit of what happens in a normal year in BetterHelp from a seasonality standpoint. Patrick anything to add?

Patrick Feeley

I think you covered it pretty well. I think the one thing I would add is, I think the point of confusion is this seasonality really hasn't existed for the past two years during the COVID period. Really in 2020, it didn't exist to any degree. In 2021, it started to come back a little bit. What you're seeing now is a return to the normal seasonality in the Patrick Feeley business. And, and maybe the other thing I would add in terms of sort of first half, second half seasonality and, and progression on the Integrated Care segment. Just remember you have normal client attrition every year. We have retention in the 90s that has not changed, but it's not a 100%.

So you always are losing some small percentage of the book. It's would be disproportionately weighted till January 1st. The new clients that are coming in though on January 1, it takes time for them to ramp up because especially if you think about the chronic care programs, we're getting paid for enrollment, so you have to go out and drive that enrollment over the course of the year and that's what to sort of ramp up in revenue and margin progression over the course of the year in that segment.

Charles Rhyee

May be just one more on better help. You know, I think this will be the first, you know, we'll see if it's a recession or not, where we, we have digital health available for consumers. And I think a lot of questions is, how sticky will this be in an uncertain environment, maybe how do you feel about how this BetterHelp business will perform in this kind of environment?

Mala Murthy

Yes, so if I think about how the businesses looking now all the underlying operating metrics are strong, retention is strong. It's really weather the macro environment over the past several months very well. You know, there was slight pressure and consumer's propensity to spend in the summer of last year as sort of the macro environment started darkening a little bit. But nothing since then, it's been very stable.

And obviously we have given a range of guidance for that business and the low end of the guidance assumes relative to where we are now that there can be some modest deterioration. You know, Charles, to your question around how should we think about this business over the longer term, obviously we aren't going to give longer term guidance. It wouldn't be prudent for us to do so just given how dynamic the environment is.

I would just say generally at a high level, the kind of guidance we have given for 2023 isn't the right zip code, I would say of how to think about this business. Remember this is a business that has grown tremendously in the last years. When I joined Teladoc Health in 2019, BetterHelp was less than a $100 million in revenue. So just think about the growth of this business and it's just not at over $1 billion in revenue now, it's just not going to continue to grow at that type of hyper growth. Plus as we have talked about balancing margin and profit, we are focusing on margin expansion in this business as well.

Charles Rhyee

So it sounds like, well getting though, well, not giving long-term guidance, if we look at the low to mid-teens guidance for this year, it's fair to think that that's a good kind of proxy, at least for the next few years that that's an achievable target.

Mala Murthy

Yes, again, as I would say, as I said, it's in the right zip code. I won't be more specific than that, but it's in the right area there.

Charles Rhyee

That's helpful. Maybe moving to Integrated Care, in our most recent benefit survey, there's a lot of strong demand for virtual primary care in the telehealth, and I think that bodes well for Primary 360. As we think about this product, maybe first just kind of share with us the traction you're seeing for this year. I know that it's still early days, but is there, how should we think about contribution within this Integrated Care number coming from Primary 360?

Mala Murthy

Yes, so, you know, let me just sort of start with, as we have talked about before, Primary 360 is how we think about the future of digital and virtual care, right? It's a really good example of how we think about integrated offerings that takes care of the whole person, body and mind. And the reason that we focus on that is because not only is it financially beneficial for us, but equally importantly it is, it delivers on both clinical outcomes for our members and cost outcomes for our clients. So, it is, as I said, how we see the future of digital and virtual care. We are really pleased with the traction that we are seeing in the market. If I can quote some statistics on how this product is resonating in the market, 60% of members haven't seen a PCP in the last two years. About 30% would not have seen a PCP, right, without this product.

I would say about half of the members use and interact with two or more of Teladoc's health services. People with chronic care, members with chronic care are four times as likely to engage with this product and nearly half of the follow on interactions, visits are for chronic care. The point being, it is a really good example of the power of the integrated offerings that we have. Charles, to your question around the contribution, this launched last year, right? So it's still relatively new in the marketplace. The revenue this year is going to be about triple of what it was last year, albeit off of a small base. We expect this to contribute more meaningfully to the Integrated Care segment starting next year.

Charles Rhyee

So, well then, if we think then the core of the Integrated Care offering to a certain extent is the legacy Teladoc business plus the chronic care business, you're guiding to mid-to-high single digits. Is this, first of all, right, if we look at historical Livongo growth, historical Teladoc growth, much faster, what's changed in the market that this is sort of the growth rate that you're anticipating? Is it that clients have already picked a provider, you're, or is it kind of saturation in the market? And what are some of the dynamics that are driving this change? And is there opportunities for this growth to accelerate in the future?

Mala Murthy

Yes, so I'll answer the question in a couple of different ways. Listen, there is no question that if I think about the overall market, it isn't growing at the break neck speed that it was a few years ago, right? COVID pulled a lot of it forward, and there it is true that the market is just growing differently than what it was a few years ago. Having said that, I would still remind you all that it is growing mid-to-high single digits off of a sizable base of revenue. And I would say more generally, as I think about the progress and traction that we are seeing in chronic care, I continue to be pleased with the traction that we are seeing in the market, whether it be the fact that if you look at our multi-condition enrollment, we've made a lot of strides in progress in that. You know, we talked about it on the recent earnings call that it's about 30% that was single digits about two, three years ago when we did the acquisition.

And much more importantly, as I look at how our integrated offerings are actually helping members from a clinical outcomes perspective, once again, it really adds weight to the proof points we have around our whole-person care. So if I look at our members who are engaged in more than one condition, so let's say someone who's engaged in diabetes, but then is incrementally engaged also with say, has access to hypertension and weight management, they're able to control their diabetes better. They're able to control their A1c levels better.

If we look at then mental health, our mental health services are integrated with chronic care and I look at the clinical outcomes for those members, once again, they're able to manage across diabetes, blood pressure and their weight better. So my point is chronic care, along with all of the other products and services we have, the sum total of the two, is absolutely sort of where we believe the future of this market is. Patrick, would you like to add?

Patrick Feeley

No, I think you can.

Charles Rhyee

This 30% number that you talked about on the call, what is a realistic percentage you think, when you guys are internally kind of thinking about because of the benefit across the synergistic benefit of having multiple solutions, is there a number in your mind that is a reasonable target?

Mala Murthy

Yes, we haven't talked publicly about a target. What I would say though is, just think again about the fact that if we think about the overall penetration of our chronic care services of Primary360, across the base of 80 plus million people we have, there is a tremendous amount of opportunity and runway for us to penetrate further and grow revenue per member with that. So I would say there is enough runway for growth ahead of that.

Charles Rhyee

And when you guys talk about sort of, you finally have a single app that's kind of integrating sort of single sign on, definitely something that I think the market prefers. I assume it's sort of now fully integrated on the back end, obviously a lot of what you spent on, well interesting though, right in your disclosures, right you talked about the hospital business though, right? It's 20% of revenue, I guess plus international which is a smaller piece. Can you talk about this business because, you bought InTouch and then you kind of quickly bought Livongo and then that's kind of dominated the discussion and what's going on in the hospital part of your business and where does that fit into the overall strategy?

Mala Murthy

Yes, so as we talked about recently, the hospital business is part of our Integrated Care segment. Listen, we are, it's relatively as a percentage of our overall book of business, it's about 5% of our revenue. So it's not huge in the context of our overall business. That said though, there are some really interesting things that are happening in that space. We talked about connected care, right? Which allows really for us to put a camera in every patient's room and that really allows hospitals to extend their nursing staff. We all know about the nursing shortage.

So it's, that is really having, that's having real traction. We are also; we continue to be really excited with the Microsoft partnership. We've talked in the past few months about the relationship we have now with Northwell, which was a competitive displacement and that is one where the partnership we have with Microsoft really helped and both us and Microsoft really leaned in into that relationship. So there are some really interesting things that are going on in that space. Patrick, anything?

Patrick Feeley

No, I think you've covered it.

Charles Rhyee

Before we move on to maybe some of the guidance and outlook just one more Integrated Care, obviously, I think what you're saying makes a lot of sense and I think the future of where this, this market's kind of going is leads that direction. And not surprisingly, you're seeing other players particularly on the payer side again now you’re launching a platform, CVS launching a platform and to do so on behavioral health. Maybe talk about sort of the competitive dynamics here because, some of these are your customers. Yes, some of them are not. And how do you differentiate yourself both working with and competing against?

Mala Murthy

Yes. All of these are our clients. We continue to have great relationships with them, whether it be CVS, Aetna, whether it be United, we continue to expand our relationships with them. What we have always said, Charles, is if you think about the assets and capabilities that we have, relative to these clients that you've talked about, we've always said we are care agnostic. We partner with payers. We are, the kind of engagement and enrollment capabilities that we have that is very unique, right? And a lot, if I think about members engaging with say, an insurance company, et cetera, right? There is a real, there is a science, there is a consumer experience that we bring to bear that I think is a real advantage. And as I said, if a minute or so ago, the good thing is we are really agnostic. We work within them, we partner with them, and we will continue to expand our relationships with them.

Charles Rhyee

Okay. So, let's touch on the outlook. Obviously you gave adjusted EBITDA guidance, $275 million to $325 million. Certainly better than I think a lot of people were expecting. Maybe talk about your comfort and ability to reach this target and maybe frame for some of the larger building blocks that would bridge bridge us from 2022 to 2023?

Mala Murthy

Yes. I'd start with revenue growth, right? We have talked about, with the guidance we gave of 6% to 11% revenue growth that is about $150 million to $270 million of incremental revenue dollars this year versus last year. You take that along with our high 60s growth margin. So that's one building block. Our gross margin expanded quite nicely in 2022 relative to 2021. I would expect to give back a little bit of it this year just because of provider cost increasing, but still with the high 60s gross margin against the revenue growth, that's the first part of that.

Then I would look at the OpEx leverage that we are driving, right? Whether it be, when we've talked about A&M efficiency for better health. The fact that we've, we have been investing quite heavily in technology and development over the past couple of years. We have talked about it quite transparently, and that's leveling off, and that should give us some leverage. And then we continue to drive G&A leverage, right? Whether it be with consolidating backend systems, real estate, et cetera.

Patrick Feeley

And then if you just think about the progression over the course of the year again, just remember that BetterHelp seasonality, fourth quarter still is likely to be the biggest margin quarter for the better health business. And then again, on the Integrated Care side, it's a little bit of tail of two halves. The back half of the year, certainly likely to be the stronger margin period than the first half again, because of that ramp up the enrollment of the course of the year and how the economics work in that business.

Charles Rhyee

Right. You also did a small headcount reduction. Do you feel like you're right-sized here or is this somewhere you could see additional reductions or…?

Mala Murthy

Yes, I would say for now we have right-sized as we wanted to. We've talked about how given the revenue growth outlook that we provided, it was one of the measures we took as we balanced revenue growth with margin expansion. And it also has allowed us, the flexibility to invest it into so certain things that we want to continue to invest it. We talked about the integrated app, Charles, the reality is in our business it's not just one thing we're investing in, right? It is a continuous expansion of capabilities that we are investing in. I can cite other examples. And so the fact is we will expand our margins and drive revenue growth and invest in the right strategic priorities for the business.

Charles Rhyee

That's helpful. Current guidance calls for, up to 200 basis points of margin improvement, obviously off of a down year. In the past, right the last time you gave long-term guidance to, you had kind of talked about a 100, 150 points of margin expansion a year. And obviously you're not giving long-term guidance, but in general, maybe at a high level, how can we, how should we piece these kind of two points together?

Mala Murthy

Yes. If you think about the components of our margin expansion, Charles, if you look at it on the Integrated Care side, what we have talked about from a guidance perspective is revenue growth of mid-to-high single digits, flat to up 50 bps. That margin expansion is certainly going to be as the revenue ramps through the year. And remember on the Integrated Care side second half margins typically will be higher than first half margins as the revenue ramps, as we enroll people, as utilization grows through the year on the BetterHelp side again, as we have talked about the guidance we have given is a low double to mid-teens, and we have talked about expanding 100, 300 bps of margins. It is really about in efficiencies.

And it is about, other cost leverage on the P&L . If I think about A&M efficiencies, we have a very strong team that knows how to do this, has been added is innovative. And certainly the competitive dynamics that we saw in the summer have abated. They're stable I would say. Now, obviously, we are still continuing to watch the macros. We'll see how the consumer sentiment is and therefore we have the range that we have given. But so far based on what we are seeing, it's stable.

Charles Rhyee

Thanks. Helpful. And we have some extra time if someone has a question. Otherwise I can keep going, but just wanted to maybe, right. You know, going back to BetterHelp, I think one of the, obviously the big concerns a couple years ago, and maybe a little bit still today is to your point, right, high customer acquisition costs. One way to offset that would be longer retention, right? And you've talked about the LTV of members.

Can you talk about how that's changed, over the course of the last couple years? And I think at one point, Patrick, you even told me, well, you know, the average membership is what, like five months, four and a half months, something like that around that range. Has that increased or has did is something the mix change within that, because when we look at the margins, right, the margins have improving. Just curious, what's kind of driving that?

Patrick Feeley

Yes, I mean, I think what we've said is the, the average duration is somewhere in that three to six month period. It's hard to, we don't like to talk about the average because you have sort of long tails of people who have been on, in therapy for many months and beyond year obviously. So we kind of talk about it somewhere and in that range of three to six months. I don't know, Mala if you want to talk about the second piece of it.

Mala Murthy

Yes. So I would say, last year, certainly as we've talked about, the margins going backwards was different, right? There were we saw certain sort of competitive dynamics last year that, as I've talked about, have a data. If I look at the underlying metrics of that business Charles, as I talked about, whether it be LTV retention, managing churn, et cetera, they are, they continue to be very strong. And what is driving that is just this environment of continuous innovation. So that's one. The second is this is where scale helps, right? The fact that this is a business that is over a billion in revenue, it scale brings certain benefits such as, number one; it is a destination of choice for providers, for therapists, right? Because they know they will have volume.

Second is it allows for better matching of consumers with therapists and that certainly has an impact on consumer satisfaction [indiscernible] and therefore LTV, right? The experience is better. It allows us to test and learn, sort of fail fast innovation. The scale allows us to do that, including by the way, testing various advertising channels. We have talked about the fact that we've, this business has seen a very strong diversification of app channels. So it's all of these and working across all of these that actually allows us to get to higher LTV and manage as shown.

Patrick Feeley

Yeah, I mean, I think one of the benefits of scale, as Mala said, is certainly the diversity of advertising channels, right? So we're able to be a significant player across channels. We're not dependent on any single channel or a single two channels. And so that's been a big benefit of scale and I think something that differentiates BetterHelp versus the competition. But it also allows, the scale that business is operating at allows a real sort of test and learn strategy in terms of customer acquisition. So you can have a lot of irons in the fire of trying to figure out different strategies and approaches to advertising and marketing when you're operating at that scale.

Since something certainly that's also a differentiator there and something that we've benefited from over the years, as that business has sort of scaled up and you can kind of see the, the margin improvement back if you, look back again when Mala first joined with the margin profile of that business was very different than where it's been over the last couple of years.

Charles Rhyee

Okay. Last question as we're kind of running up on time here, you alluded to a little bit earlier, right, some of the competitive dynamics in the market. And I think a lot of the commentary was right during the COVID period you had a lot of VC money kind of flood in and invested in a number of businesses, and those were all trying to build up enough scale to justify, continued funding. Obviously then there's a, have you seen that kind of dry ups and, are you starting to see some of these startups kind of out of consolidating or kind of going by the wayside? Is that what's driving the more stability that you're seeing in the pricing?

Mala Murthy

So I would say, so let me address it two ways. First of all, when it comes to the DTC mental health base certainly to your point Charles, if you think that last summer there were a lot of VC money being poured in at the same time those, several of these were facing regulatory pressures and other parts of their business and therefore were sifting to therapy which is BetterHelp space. And so that was what caused the dynamic. I will say, I won't speak for to their financial standing, you all can conclude what you want to or what you will, but I will say for BetterHelp, part of being in Teladoc is we are scale, we have a strong balance sheet. It helps to have close to a billion dollars of cash.

We are free cash flow positive. So in my view, all of these things add to the financial strength and it will help us regardless of whether it is on the BetterHelp side or whether it is on the Integrated Care side, it allows us to improve, balance revenue growth, that margins and expansion, and continue to invest in the right things for the longer term success of the company.

Charles Rhyee

Great. I guess we'll end it there. I want to thank you both Mala, Patrick.

Patrick Feeley

Thanks Charles.

Charles Rhyee

Thanks for joining us.

Mala Murthy

Thank you.

Question-and-Answer Session

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