Teladoc Health, Inc. (NYSE:TDOC) 35th Annual Piper Sandler Healthcare Conference November 28, 2023 12:00 PM ET
Company Participants
Jason Gorevic – Chief Executive Officer
Conference Call Participants
Jessica Tassan – Piper Sandler
Jessica Tassan
All right. So, good afternoon everyone, my name is Jessica Tassan. I’m the healthcare services analyst at Piper. And I’m thrilled to be here with Jason Gorevic, CEO of Teladoc, the country’s largest and most diversified digital healthcare platform, and serving over 90 million DTC employer and payer lives. So, Jason, welcome back to the Piper Conference, and thanks so much for taking the time.
Jason Gorevic
Thanks, Jess. I’m happy to be here.
Question-and-Answer Session
Q – Jessica Tassan
So, I wanted to begin with my favorite segment, U.S. Intergrated Care, where growth accelerated to 9.2% year-over-year in the third quarter, and let the company’s 3Q ’23 adjusted EBITDA be as segment margins expanded from 10.5% 2Q, to about 16.8% in 3Q. So, just what drove the accelerating top line momentum and profitability in U.S. Integrated Care in the third quarter?
Jason Gorevic
Yes, so if I step back, I would say we’re pleased across the board with our third quarter results. We were within our guidance on revenue, and significantly beat our guidance on adjusted EBITDA. I think that reflects what we’ve been saying about a balanced approach to top line and bottom line growth. We’re seeing significant margin expansion over the course of the year as we’ve focused more on costs, but also driven strong growth, as you mentioned. Integrated Care was particularly strong in the quarter. That’s really driven by primarily our Chronic Care Performance, where chronic care enrollment to a program enrollment was up 13% year-after-year. That’s a very strong result.
And I think it’s a result of a few things. One is we continue to sell more and more bundled services where we’re selling multiple chronic care programs into the same client. That yields better overall enrollment both on a unique user-basis, as well as multi-program enrollment. And of course that translates to better economics because our Chronic Care Programs generally are a higher revenue-per-member, and also tend to operate at a higher margin because they are truly digitally-enabled.
Jessica Tassan
I think that makes sense. So, can you maybe just help us understand the difference between bundled chronic care and provider-based care? And when did the latter launch, if at all?
Jason Gorevic
Yes. So, bundled chronic care really means, at a single price point, we’re selling multiple programs into a client. I think that’s reflective of one of our key competitive advantages, which is the breadth of our product portfolio, where a client can come to us for an entire cardio-metabolic suite, where an entire cardio-metabolic suite, along with virtual primary care and mental healthcare. And what we see there is, at a single price point we can sell some multiple chronic care programs. That ends up being attractive to a broader population, and therefore we get more unique users. But also, there’s a benefit to getting people to engage in multiple chronic care programs. We’re now at the point where more than one-in-three of our chronic care members is engaged with more than one of our programs. That yields really two benefits. One, better clinical outcomes, right, so, better clinical outcomes drives better results for the client. And in many cases, we’re just going to clients saying, “Hey, we’re willing to put our fees at risk for those clinical outcomes.” The second thing it yields is greater retention. So, once someone engages with multiple programs, they’re more likely to stay with us for a longer period of time.
Provider-based care can be a component of that. So, provider-based care is where we take our physician network, and we apply it to either our mental health care programs, which is where we stated with provider-based care, or one of our chronic care programs. So, we went from provider-based care in mental health to diabetes, to now — to then hypertension, and now, weight management as we see the emergence of GLP-1s in the market, and clients really looking for a solution to them manage that cost.
Jessica Tassan
Okay. So, a lot there that’s extremely helpful. I think I heard you say 30% of eligibles are enrolled. Would you expect that number to tick higher as these bundled programs really proliferate? And then you mentioned, also, that retention has improved as these bundled programs have been adopted in chronic care. Are you able to quantify that improved retention at all? And is that trend expected to continue, so just sustained kind of improvement in chronic care retention?
Jason Gorevic
Yes. So just to be clear, what I said is one in three people who are enrolled in a chronic care program or using more than one of our chronic care programs.
Jessica Tassan
Okay.
Jason Gorevic
Not 30% of eligibles are enrolled. We haven’t quantified publicly the increased retention rates. What I would say is we’re seeing increased retention rates across the board with respect to our chronic care programs. And that is directly attributable to that multiple program enrollment. We especially see that when people enroll in both the diabetes program and the hypertension program and a diabetes program and a weight management program, they end up just having greater frequency of interaction with Teladoc Health, and that drivers better promoter score and better retention.
Jessica Tassan
Got it. So, when did Teladoc start marketing provider-based chronic care? And are we seeing this product and the strong sequential chronic care growth year-to-date or is that more of a 2024 event? I think what we’re most interested in is, is this your response to the proliferation of GLP-1, and kind of demand for a utilization management tool?
Jason Gorevic
So, we introduced provider-based care first with our mental health programs, where we said you can get therapy, and we can also bring in a psychiatrist who can prescribe SSRIs or something like that. Obviously, we have to be careful and not go to scheduled drugs, but so that started long before we ever did anything relative to the broader set of cardio-metabolic chronic conditions. We then introduced it to our diabetes program so that our physician could help tritrate medications for a member. Again, before GLP-1s became all the rage that everyone wants to talk about. Certainly, the introduced — introduction of provider-based care to our weight management programs, and especially diabetes prevention, that is absolutely in response to the proliferation of GLP-1s, and we’re seeing a few things that I think are really notable.
First of all, the entire gamut of experiences with respect to coverage, non-coverage, on-formulary, off-formulary, and specifically whether people are fully embracing it, we see some employees say, “We’re all in on GLP-1s, [we can taper] (ph) our employees.” We see others saying, “I am terrified of the long-term costs of these medications,” and kind of everything in-between. I think that people who are coming to us for solutions recognize a couple of things. One, that GLP-1s by themselves are not a panacea that is sustainable from a cost perspective, right? And so, they recognized that you have to have behavior change in terms of, especially diet nutrition and activity in order to make this a sustainable program, where someone can go on a GLP-1, engage in significant lifestyle changes, and then wean off of those very expensive medications. I talk to CEOs all the time. They’re saying, “I expect my cost of GLP-1s to double or triple next year.” And that just can’t be sustainable. So, they’re coming to us for the broad set of capabilities that we have as a companion, to a shorter duration on GLP-1s.
The second thing we’re seeing is, especially health plans, who are saying, “I need something to put alongside my prior-off program for these GLP-1s.” So, in order to get coverage to begin with, or a sustained coverage over time for these medications, someone has to engage in your weight management and/or diabetes prevention program so that we — and we need proof that they’re engaging over the long-term, so that it’s not just a drug as the silver bullet. And I think that’s where we can play a significant role in the market, and help our clients do what they’re really looking for from all of our programs, which is improved clinical outcomes and contain their costs.
Jessica Tassan
I think that makes a lot of sense. So, just to be clear, is Teladoc’s provider-based chronic care platform capable of, kind of, shepherding someone through GLP-1 evaluation, procurement, titration, the prescribed [technical difficulty] kind of the whole UM gamut, this solution is an answer?
Jason Gorevic
So, I wouldn’t describe us as a UM provider. I would say that we are certainly in the position where we can prescribe, manage, tritrate, and help then ultimately wean them off of GLP-1s. Whether that has an impact on whether they’re taking insulin or not is really very clinically dependent. And so, I’m going to stop short of saying we’re going to end the use of insulin that would probably be an over-reach for anybody to say.
Jessica Tassan
That’s fair. So, of the 90 million-plus integrated care members today, do you have any sense of how many have access to GLP-1s in 2023, and how many might in 2024?
Jason Gorevic
When somebody asked me today how many people are going to be GLP-1s, and I — I’m —
Jessica Tassan
[Indiscernible]
Jason Gorevic
Yes, I’m not going to look into that crystal ball. Certainly, there’s a lot that’s evolving right now. I think a lot of it will depend on what does of the cost of the medications look like over time. That will impact what’s the treatment of health plans and employers relative to their formularies, their benefit structures. And those are going to have an impact on how many people really engage with them. So, I’m going to leave that to other experts in the pharma area.
Jessica Tassan
That’s fair. So, and just with respect to the chronic care programs for hypertension, diabetes, weight management, should we think about those as, according to the bundled offerings, all being priced essentially a parity, and then maybe some slight PMPM lift from the provider-based care?
Jason Gorevic
When those are purchased on an individual basis, they have multiple price points, right?
Jessica Tassan
Okay.
Jason Gorevic
So, what we’ve done, however, with bundling is be able to say, we’re going to give you one price point for every enrollee, the same price point for every enrollee, regardless of how many of those programs or which programs they enroll in, right? And so, that enables us to streamline the contracting process. We’re talking about one price. And be able to go out to the population with a broad message about engaging in any of these programs without us having different economics depending on where they engage. And it ultimately makes us aligned in our incentives with the client about engaging people across multiple programs which, as we said improves outcomes and retention rates.
Jessica Tassan
I think that makes a lot of sense from a commercialization perspective. So, just as kind of testament to Teladoc’s breadth and scale, and just the uniqueness of the platform, in 3Q, you added about 4.3 million U.S. Integrated Care members. As we understand it, these members didn’t meaningfully contribute to reported results in the quarter. So, what were the circumstances surrounding thing huge competitive win and how should we expect contribution from those 4.3 million lives to ramp?
Jason Gorevic
Yes. So, first, I would say that client — we already had a relationship and a substantial membership base with that client. We had a competitor who flattered in the market. And we were able to step in for this client. And take on that whole 4 plus million members. The product for which that was servicing was essentially our general medical virtual urgent care product for a Medicaid population. And as result, is a relatively small contribution of revenue per member. That’s why as we said, it didn’t have a significant contribution if not material in terms of the overall context of our business, but where we see that being beneficial always is our land and expand strategy, right? So, that’s always our opportunity for a bigger footprint and then sell additional products and services into the client for that population.
So, we hope that that revenue will continue grow for that same population over time. It certainly cements and improves our relationship with that client. There is nominal economics from it. But I think the fact that about three quarters of our sales come from existing clients is really a testament to that land and expand strategy. And it’s how we have been able to then take advantage of really what is, I think, an underappreciated competitive moat in that $90 million members who have access to our platform.
Jessica Tassan
Okay. That’s a very helpful color. And within Integrated Care fourth quarter guidance calls for — and I know Mala is not here, but fourth quarter guidance calls for sustained high single digit year-over-year growth in U.S. Integrated Care. But suggest that margins are going to contract from about 17% in 3Q to about 12%. We know there were some onetime performance related revenue as recognized in 3Q. But what else is driving the anticipated margin contraction? And are these onetime investments are kind of structural cost?
Jason Gorevic
So, a few things in there, one as you mentioned, we had about $4 million [good guy] (ph) in Q3 from a performance payment that we realized in Q3 as a onetime thing. We do think that performance-related relationships and the economics that will benefit us will continue to grow into the future. In the fourth quarter, there are a few things that I think are important. One, fourth quarter tends to be seasonally higher cold and flu season. Higher infectious diseases drive higher visit– general medical visits. Those are inherently lower gross margin. And therefore, lower net margin. Just puts a little bit of contraction on our Q4 margins versus our Q3 margins. That’s a good thing in terms of just the health of the business and us being there for our members. Second thing is we generally spend in the fourth quarter ahead of first quarter implementations.
So, as we go live with the population on 1×1, we want to get ahead of that in Q4 by engaging that population so that we hit the ground running. So, there tends to be expenses that we recognize in the first — for fourth quarter that we do see revenue until the first quarter. So, there is just a higher expense base. And I think overall if you look at the entire year, which is what I would encourage you to do, you’ll see material margin expansion across the business. And that’s very intentional as we look to get leverage out of the P&L.
Jessica Tassan
So, last question on Integrated Care. Where do you expect this business to be in maybe 5 years from a member perspective, a PMPM perspective, and a margin — any qualitative commentary on margin perspective?
Jason Gorevic
Yes. So, look, five years is an eternity in our business. I would say this, people ask me frequently like, Jason, what we will be surprised about the business five years from now? I think you’ll be surprised that when you ask people where they get their healthcare, they answer is Teladoc Health. Not where do you get your diabetes management program. Not where do you get virtual urgent care. Not where are you going for virtual or mental healthcare. But where are you going for your healthcare. Like who is your healthcare partner writ large. And I think that’s the role and the opportunity that the Integrated Care business has to play in the healthcare system. It’s almost like this sort of uber multi-specialty clinic without walls that can be ubiquitous across the country and across clinical specialties.
And really, that’s the vision for our whole-person care. I think in terms of margin, you are going to continue to see us expand margins in the business for the foreseeable future. I am not going to quantify how much on an annual basis or for what duration or what’s the terminal margin there. But we are very focused, as we’ve said, on the balance of margin expansion and continued top line growth. The business has significant scale at this point. We will continue to leverage sort of the middle or the P&L, but we also continue to get economies of scale across areas. We’ve seen gross margins be, I would say, most external parties should say, astoundingly resilient as we’ve continued to scale and in the face of medical economics being challenging relative to the cost of labor and things like that. So, you’ll continue to see the margin of that business expand.
Jessica Tassan
Awesome. I think we are very excited about that part of the business. I want to move on to BetterHelp. So, in the BetterHelp segment, Teladoc delivered healthy 8% year-over-year revenue growth and a 9% adjusted EBITDA margin in 3Q. In 4Q, the segment is expected to deliver low to mid-single-digit revenue growth and a 22.5% adjusted EBITDA margin at the midpoint. So, this guidance largely parallels the results Teladoc delivered in 4Q ’22. But to put it bluntly, how is Teladoc going to pull it off this year?
Jason Gorevic
Look, I mean, I think people have a hard time sometimes understanding just the cadence and the investment, the investment cadence and the seasonality of the BetterHelp business. And we’ve also done some different things as we’ve seen different dynamics in the ad market, right? So last year, we pulled back on ad spend in the first-half because of a challenging environment. We spent more than half of our spend in the back-half of the year. This year, it’s the opposite of that. So, there’s a little bit of challenge relative to, I don’t know, lapping of quarter-to-quarter.
So, first thing I always say about BetterHelp is I’d suggest looking at it on an annual basis more than a quarterly basis. I think that, like, you try to look at that business on a quarter-by-quarter basis, and you’re subject to, like, the levers that we’re pulling on a daily basis and weekly basis relative to our ad spend and depending on what the ad and customer acquisition cost environment is. So, I would say that’s the biggest thing. We always pull back on like, this time of year is the most expensive time of the year to advertise. So, we always pull back on ad spend at this time of the year. There were a couple of exceptions in, like, the height of the pandemic when that wasn’t the case. But for the last 2 years, we’ve seen that. And so, that’s the biggest line item of cost in the P&L. So, as we pull back on that at this time of the year, you just naturally get the margin expansion in the fourth quarter. And so I would encourage people to look at it on an annual basis.
And then, you should expect to see us reinvest in the beginning of the year as we get into — we get out of the holiday season, ad costs come down, and we get into the New Year’s resolution season where people are more receptive. And so, you’ll continue to see that. And then — so what we said on the call was don’t expect the fourth quarter trend to be indicative of what the ’24 trend is going to be.
Jessica Tassan
I think that that’s really helpful and something I wanted to focus on. So, and 4Q BetterHelp is expected to grow low to mid-single digits due to the cadence of ad spend in ’23 Mala told us on the 3Q call that 4Q BetterHelp revenue growth guidance is not indicative of underlying growth in that business, so should investors think about the 2023 overall year-over-year growth rate for BetterHelp as being indicative of the underlying growth in that business, so we’re modeling 11.6% and I think guidance is low double digits year-over-year or is it somewhere in between?
Jason Gorevic
No. So, look I’m not going to give guidance for ’24, but I think, yes, you should look at ’23 full-year as more indicative of what ’24 will be like.
Jessica Tassan
That’s really helpful. And please give me credit for a valiant attempt. So, if BetterHelp a margin expansion story from here at about 12.5% in ’23 or just given a scale, is the future of this business kind of a fight to flat on the adjusted EBITDA margin side?
Jason Gorevic
No, I think we’ll continue to focus across the business on margin expansion. I think there’s naturally more room for margin expansion in a B2B business where you get significant leverage, you have long tenure of your clients, like that’s just sort of a normal thing. But we will continue to expand margins on both segments of the business.
Jessica Tassan
That’s very helpful. So, last one on BetterHelp, any fundamental changes in the BetterHelp business that you’d call out in terms of net realized price, retention, or revenue per member? We’re basically trying to understand if kind of BetterHelp advertising ROI is stable year-over-year?
Jason Gorevic
Yes. So, I would say a couple of things. Retention continues to get better, LTV continues to get better and actually we’re seeing strong resilience in terms of pricing. Where we’ve seen challenges is in the customer acquisition cost, right? And I think we’ve been pretty public about this. We said top of our range assumes that there’ll be an improvement in the customer acquisition costs. Bottom end of the range means it stays sort of stubbornly a little bit worse than our expectations for the year, and that’s where it’s been, right, it’s just stayed a little worse than our expectations for the year.
Now let me be clear. That’s a significant improvement over what it was last year, right? So if you look at, we had 500 basis points of margin expansion in Q3 of this year versus Q3 of last year, like we’re improving margins. The customer acquisition cost came down versus what we saw as a spike and then a moderation in the back-half of the year in customer acquisition costs last year. They’ve improved since then. They’re slightly worse than our expectations, and we’re doing a lot to experiment with new channels, new markets and new techniques in order to continue to moderate the customer acquisition costs and then get a little bit more yield on our ad spend.
Jessica Tassan
That’s really helpful. So, I’m going to switch to two last enterprise questions. So, on the 3Q call, 2023 bookings were described as flat to slightly up year-over-year with stable retention. So, at the time of the 3Q call, would you have had complete visibility into the ’24 selling season, or is it possible that some upside could materialize in the last couple months of the year?
Jason Gorevic
So no, I mean the fourth quarter is an important quarter with respect to bookings. Based on my outlook now, I’d say I expect our bookings to be up in the range of 10% this year versus last year. So, that’s positive. It’s on the back of strong chronic care sales, strong multi-product sales. So, we feel good about that. And again, just as a reminder, that’s all on the integrated care side of our business. And so I feel good about where we are. And we’ve got a couple of weeks left in the selling season. So, anything can happen, but I feel good about where our bookings are.
Jessica Tassan
Okay, that’s very helpful. And I guess maybe to round things out, in your conversations with investors, what do you think is the most underappreciated part of the Teladoc story? And is 2024 the turning point to kind of bring the market into the life?
Jason Gorevic
Yes, look I’m sure I’m not the only CEO who gets frustrated by the quarter-to-quarter focus. And I think investors, many times fail to step back and look at the bigger picture opportunity and the role that we can play. The value of that 90 million member installed base and our track record of selling additional products and services into that installed base to continue to bring more value to our clients and get more economic value for the company and our shareholders.
And then lastly, I think to be honest, I feel frustrated that we haven’t gotten more credit for improving our bottom line performance and doing what we’ve said we were going to do which is balancing our growth on the top line and bottom line and expanding margins and getting real leverage and scale out of the business. And I think that’s reflective of the financial strength of the business and our maturity into the next phase for the company which is really driving significant cash flows, margin expansion, leveraging the fact that we have a strong balance sheet and being able to be the beneficiary as others in the market shake out and can’t compete.
Jessica Tassan
That’s quite a few things that we’re not appreciating just yet. But I appreciate the time. Thank you so much, Jason, and thank you so much for joining us and thanks everyone.
Jason Gorevic
Thanks, Jess.
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