TDOC - I should have sold last August

I wanted to touch on Teledoc given there are still people holding it, and given my past writeup and following thread here -…. I just sold out from a ~5% position after their Q2 report and wanted to rewind the clock and expound on lessons learned that may be useful.

Back almost exactly 1 year ago today, both Saul and Bear gave reasons why the merger of Livongo and Teledoc was a negative development for existing shareholders. In particular, I recall Bear saying,

"If you were a LVGO owner, this is now NOT the company you invested in.

If you were a TDOC owner, this is now NOT the company you invested in.

This is something else, and you don’t know what their growth will be like, what their future will look like, how the market will value them. You are speculating.

Look at the part of Bear’s comment I bolded and think about that for a minute…

Hindsight is always 20/20, but what was I thinking holding on this long? I was thinking that both companies had been great businesses and would continue to be great businesses together, and that they had obvious synergies that would help them realize their combined potential quickly. What didn’t I fully take the time to understand?

For one, I don’t think I truly understood the dilution to existing shareholders, and “how the market would value” Teledoc after the merger. It’s not that I didn’t know what the numbers were - I knew TDOC’s cash-and-stock offer valued LVGO at $158.98/share. At the time the merger closed, I knew that LVGO shareholders got 0.5920 shares of TDOC plus $11.33 in cash for each LVGO share. But I didn’t take the time to really understand what that meant for me as an independent shareholder.

Directly from TDOC’s Q3 2020 report was the following on page 27:

The total consideration received by Livongo shareholders from the Company was $12,846.3 million consisting of $432.9 million of cash and 60.4 million shares of Teladoc Health’s common stock valued at approximately $12,413.4 million on October 30, 2020.

Fast forward 6 quarters later, and TDOC has gone from ~74M shares outstanding to ~159M shares outstanding, and it’s not like they gave any of us existing shareholders any of those additional shares!

Then came the Q4 report on March 1st of this year, and the stock based compensation was literally 108% of total revenue!. Now on an adjusted basis, TDOC has increased their EBIDTA from $50M, to $56, to $66 this past quarter, but I think when you’re publishing net losses like they are, even as stock-based comp has moderated to 16% of total revenue, it’s still jarring for investors and the street. And….their operating losses are still widening relative to where they were pre-merger.

The most troubling thing of all right now, though, in my opinion is their almost complete stagnation in US total memberships, as you can see in the data below. Total US memberships have grown sequentially at a rate of 0%, 1%, -1%, and 1% in the last 4 quarters, and they are again projecting about 1% growth next quarter! Those are ugly numbers as an investor looking towards future growth. Their international business isn’t faring too well either, having plunged in Q3 last year and hasn’t really recovered since. As an example, of where they are at Internationally, in Q4 2019 they did $290k in paid visits internationally. Their last 3 quarters has been $110k, $120k, and $130k respectively.

¦                                                            ¦ Q419  ¦ Q120   ¦ Q220   ¦ Q320   ¦ Q420   ¦ Q121   ¦ Q221   ¦
¦ Total Patient Visits (millions)                            ¦ 1.2   ¦ 2      ¦ 2.8    ¦ 2.8    ¦ 2.96   ¦ 3.2    ¦ 3.5    ¦
¦ Paid Member + Paid Visit (US) (millions)                   ¦ 0.441 ¦ 0.648  ¦ 0.8    ¦ 0.68   ¦        ¦        ¦        ¦
¦ **Total US Paid Memberships                                  ¦ 36.7  ¦ 43     ¦ 52     ¦ 51.5   ¦ 51.8   ¦ 51.5   ¦ 52**     ¦
¦ Membership Utilization %                                   ¦ 9.49% ¦ 13.36% ¦ 16.00% ¦ 16.50% ¦ 17.70% ¦ 19.60% ¦ 21.50% ¦
¦ Platform Enabled Sessions (virtual voice/video) (millions) ¦       ¦        ¦        ¦ 0.986  ¦ 1.09   ¦ 1.1    ¦ 1.02   ¦
¦ **Customer Growth (QoQ)(Total US Paid Memberships)           ¦       ¦ 17%    ¦ 20%    ¦ 0%     ¦ 1%     ¦ -1%    ¦ 1%**     ¦
¦ Customer Growth (QoQ)(Paid Visits US)                      ¦       ¦ 47%    ¦ 23%    ¦ -15%   ¦        ¦        ¦        ¦
¦ Customer Growth (QoQ)(Platform Enabled Sessions)           ¦       ¦        ¦        ¦        ¦ 11%    ¦ 1%     ¦ -7%    ¦
¦ Total Patient Visits (QoQ)                                 ¦ 29%   ¦ 67%    ¦ 40%    ¦ 0%     ¦ 6%     ¦ 8%     ¦ 9%     ¦

They’ve been relying on their utilization of existing memberships and all of the “levers” they have in their programs (eg. Primary360) for existing members to to carry their revenue forward, and they keep talking about it on their conference calls as to how great their utilization numbers are and how many levers they have to pull to generate revenue with existing memberships, but if they aren’t able to generate new memberships, eventually that revenue growth is going to falter, and this is already evident in the decline of their total revenue growth rate sequentially QoQ over the past 3 quarters, from 33%, to 18%, to 11%.

From the conference call, I thought this was a particularly interesting exchange:

Richard CloseCanaccord Genuity – Analyst
Maybe to just dive in a little bit more on George’s question. The Street’s at like 58 million members, I guess, estimate for next year. And it sounds like you made good progress with HCSC. But is that, call it, 9% year over year too robust and maybe ratchet that down and increase the wallet share? Is that something you would recommend?

Jason GorevicChief Executive Officer
So Richard, we’re going to stop short of giving guidance for next year. It’s a little early for that. What I would say is we are – we have been talking a lot about the expansion of our revenue per member. The fact is the breadth of our capabilities drives expansion of revenue per member, and the expanding role that we play in the healthcare system drives expanding revenue per member, right? So as – I talked about our Primary360 is a perfect example of where we’ll see higher PMPM and higher visit fees.
The fact that we’re up to 20% of chronic care enrollees, accessing multiple chronic care solutions drives higher revenue per member. The fact that our sales are now 75%-plus multi-product drives higher revenue per member. So if you’re asking me, will a 9% expansion of membership get us to the numbers that we aspire to and expect to deliver? The answer is no, right? Will an expansion of our PMPM drive across the 70 million people who currently have access to our service? Certainly, that has a big lever to pull, and we expect to continue to add to that. So it’s going to continue to be a mix of more people accessing more products with more visits and in new payment models that drives higher revenue.

The analyst is basically saying: Hey! We can see that your total memberships isn’t growing, so should we lower our expectations there from 58 million to something lower?

And then the CEO is like: Yea…so…we’re not really going to focus on membership expansion to drive our revenue growth. We’re going to focus on driving growth through existing members as our primary driver.

So they are telling you, you better be a believer that they can grow their revenue competitively with their existing members, because that’s where they are banking their growth on.

What are realistic expectations of expanding the utilization and product mix of their current members to sustain growth rates that are over 30-40%? They already have 1/5 member utilization at ~21.5%. If I understand their membership numbers correctly, essentially if you work for a company that provides Teledoc services, you get counted as a member. If so I have a hard time believing there’s a lot more than 1/5 members that want to use their services in any sort of way that drives recurring revenue.

I sincerely hope I’m wrong and that Teledoc starts crushing it both on current member services and growing future memberships. If they do, I’ll have my eyes and ears wide open, but right now I just don’t see it.



Great post, Chris. I have been trimming since March and finally sold my remaining 5% position in TDOC last week - thinking along much the same lines as you. Bummer - as at one point the position was over 30% because of how well early buys of LVGO did for me (my mistake letting it get to that size - should have been trimming earlier). It’s Saul’s famous mantra of when the narrative changes… but I think I was still attached to the LVGO narrative and hope instead of taking a clear-eyed look at what was happening with the business. I’m ok with giving some companies a bit longer of a runway but it’s not happening with this one. What it came down to for me was - Livongo had a proven solution that worked and that both their members and customers loved. TDOC came in and made it much more complicated. What they’re trying to do is more ambitious but with that, way more uncertain and a lot more risky - so I decided I had better options for my money. Anyway, I do think they still may get their act together one day but who knows how long that will take. We’ll see.