I’m holding onto a 7.5% position in Teledoc post-merger. There have been plenty of positive anecdotes shared on Saul’s board on both Livongo and Teledoc throughout 2020, from COVID’s impact directly on telehealth demand, to a loosened regulatory environment and the implications for insurance companies, to preventative medicine and the push for better health care.
But there’s also been a lot of skepticism and perhaps deservedly so, especially around the merger itself, including why Livongo would sell at only a 10% premium, and what kind of TAM does virtual and telemedicine actually have in practicality, even assuming the combined TDOC/LVGO company takes a majority of market share. And from a stock ownership perspective, much has been discussed around the investment thesis changing with the combined company and the results going forward being, at best, unpredictable.
From my vantage point, that has left the future of the combined Teledoc/Livongo company in “battleground” status as it relates to shared opinions on this board, as opposed to something like Crowdstrike where sentiment is probably above 90% positive and a good chunk of us are holding 20%+ positions.
Some, if not most, of the answers to the questions above are simply going to take time to play out, but we should start to get a much better picture starting in February when Teledoc reports for the first time in a full quarter as a combined company.
With that all in mind, I’m going to confess that as of the past few months of holding TDOC, I’ve been relying on what others on this board have shared in both data and anecdotes, as well as my gut instincts and feelings around the healthcare industry, rather than putting in the work to really dig into the numbers and what the companies have said leading into their first combined report. Too much “I think…” and “I feel…” without putting in the work to analyze the companies we own is dangerous - I’ve fallen into that trap all too often, and (high) stock performance is just a facade to mask it as if it wasn’t necessary.
I finally sucked it up and put in the work, so today I’m going to share the numbers for both companies that I’m looking at up through Q320 reporting, my thoughts on deriving some insight from those numbers as well as insight from what the companies have discussed since the announcement that might help you (and I) think through best course of action on TDOC leading into their Q4 report, as well as how to react quickly as necessary based on their reported results.
I will preface the below by stating that ExponentialDave already gave a great shorthand review of TDOC’s Q3 report - https://discussion.fool.com/tdoc-q3-2020-earnings-summary-346987…
On to the numbers, and in particular the income statements of TDOC and LVGO, starting with TDOC - they’ve been breaking out their revenue by Subscription Fees and Paid Visits. While they do have some “International” business, in terms of subscriptions, that business is growing at a slower rate than the US. Furthermore, the Paid Visits internationally are just a tiny fraction of the subscription business. The need for telehealth, regardless of any debate about how big exactly that need is, certainly does not have any geographic bounds in terms of value-add, so this is something I’d like to see better numbers going forward on.
As far as US-based revenue and the bigger revenue picture overall, there really wasn’t the kind of spike with COVID that I had perceived there was prior to actually gathering these numbers. In fact, the QoQ numbers for Visits in aggregate was down sequentially each of the past 4 quarters. The subscription numbers, if anything, are where the COVID bump came from, as those accelerated to 33% sequentially in Q2, and still a healthy 24% sequential jump in Q3. That said, I can’t help but objectively question the demand when paid visits are not pacing with subscriptions, as if implying a difference between forced COVID-driven demand (subscriptions) vs. “I really want to use this service!” demand (paid visits).
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| | Q319 | Q419 | Q120 | Q220 | Q320 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Total) | $138.00 | $156.50 | $180.80 | $241.03 | $288.80 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Subscription Access Fees - US) | $92.10 | $98.05 | $107.94 | $152.02 | $194.62 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Subscription Access Fees - International) | $27.03 | $28.92 | $29.11 | $30.15 | $31.98 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Paid Visits - US) | $14.14 | $21.27 | $30.90 | $39.04 | $35.07 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Paid Visits - International) | $0.40 | $0.29 | $0.26 | $0.35 | $0.10 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Visit Fee Only - US) | $4.31 | $7.96 | $12.59 | $19.47 | $15.87 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Other) | | | | | $11.15 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev Growth (YoY)(Total) | 24.00% | 27.00% | 41.00% | 85.00% | 109.28% |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev Growth (QoQ)(Total) | | 13% | 16% | 33% | 20% |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev Growth (QoQ)(Visits) | | 57% | 48% | 35% | -13% |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| Rev Growth (QoQ)(Subscription) | | 7% | 8% | 33% | 24% |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| | | | | | |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| EPS (Adjusted) | -0.28 | -0.26 | -0.4 | -0.34 | -0.43 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
| EBITDA (in millions) | $9.02 | $15.20 | $10.68 | $26.27 | $39.50 |
+--------------------------------------------------------------+---------+---------+---------+---------+---------+
On the Livongo side, the revenue numbers are much simpler and the growth story a bit more impressive than Teledoc. Note: Livongo’s breaks out “Estimated Value of Agreements” (EVA) as those agreements signed in the quarter with new Clients or expansions entered into with existing clients. They used to call this out as Total Contract Value (TCV). Livongo says about EVA - “Estimated Value of Agreements is helpful in evaluating our business because it provides some visibility into future revenue. Our new client subscriptions typically have a term of one to three years, and we generally invoice our clients in monthly installments at the end of each month in the subscription period based on the number of members in such month who were active on or used our solution within a certain period of time, as specified in the applicable client’s agreement.”
Livongo had turned a profit and had a clear bump in revenue growth from 8% in Q419 to 37% Q120 sequentially. On total revenue, the sequential pullback in Q3 was similar to Teledoc’s, but they had a pretty big bump in EVA.
+-------------------------------+---------+---------+---------+---------+---------+
| | Q319 | Q419 | Q120 | Q220 | Q320 |
+-------------------------------+---------+---------+---------+---------+---------+
| Rev (in millions) (Total) | $46.70 | $50.40 | $68.80 | $91.90 | $106.10 |
+-------------------------------+---------+---------+---------+---------+---------+
| Estimated Value of Agreements | $85.50 | $76.70 | $89.00 | $108.70 | $145.90 |
+-------------------------------+---------+---------+---------+---------+---------+
| EPS (Adjusted) | -0.05 | 0.02 | 0.03 | 0.11 | 0.16 |
+-------------------------------+---------+---------+---------+---------+---------+
| EBITDA (in millions) | -$3.90 | $1.60 | $3.80 | $13.30 | $20.70 |
+-------------------------------+---------+---------+---------+---------+---------+
| Rev Growth (YoY)(Total) | 148.00% | 137.00% | 115.00% | 125.00% | 127.19% |
+-------------------------------+---------+---------+---------+---------+---------+
| Rev Growth (QoQ)(Total) | | 8% | 37% | 34% | 15% |
+-------------------------------+---------+---------+---------+---------+---------+
On Expenses as a % of Revenue, TDOC has been pretty steady. Their Gross Margins have slight variation, but solidly above 60%
+-------------------------------+--------+--------+--------+--------+--------+
| | Q319 | Q419 | Q120 | Q220 | Q320 |
+-------------------------------+--------+--------+--------+--------+--------+
| Total CoR | 31% | 35% | 40% | 38% | 36% |
+-------------------------------+--------+--------+--------+--------+--------+
| Gross Margin (TOTAL) | 61.00% | 65.00% | 60.00% | 62.30% | 63.70% |
+-------------------------------+--------+--------+--------+--------+--------+
| | | | | | |
+-------------------------------+--------+--------+--------+--------+--------+
| Advertising and Marketing | 23% | 16% | 18% | 20% | 18% |
+-------------------------------+--------+--------+--------+--------+--------+
| Sales | 12% | 11% | 10% | 8% | 8% |
+-------------------------------+--------+--------+--------+--------+--------+
| Technology and Development | 11% | 10% | 11% | 10% | 10% |
+-------------------------------+--------+--------+--------+--------+--------+
| Legal and Regulatory | 1% | 1% | 1% | 1% | 1% |
+-------------------------------+--------+--------+--------+--------+--------+
| Acquisition and Integration | 1% | 2% | 2% | 1% | 9% |
+-------------------------------+--------+--------+--------+--------+--------+
| General and Administrative | 28% | 28% | 25% | 23% | 20% |
+-------------------------------+--------+--------+--------+--------+--------+
| Depreciation and Amortization | 7% | 6% | 5% | 4% | 4% |
+-------------------------------+--------+--------+--------+--------+--------+
| Operating Margin | -14% | -10% | -12% | -3% | -7% |
+-------------------------------+--------+--------+--------+--------+--------+
Livongo’s Gross Margins were comfortably above 75% and their Operating Margins has swung impressively into positive territory in 2020
+----------------------------+--------+--------+--------+--------+--------+
| | Q319 | Q419 | Q120 | Q220 | Q320 |
+----------------------------+--------+--------+--------+--------+--------+
| Total CoR | 26% | 26% | 26% | 23% | 24% |
+----------------------------+--------+--------+--------+--------+--------+
| Gross Margin (TOTAL) | 75.00% | 79.20% | 74.40% | 77.30% | 75.60% |
+----------------------------+--------+--------+--------+--------+--------+
| | | | | | |
+----------------------------+--------+--------+--------+--------+--------+
| Research and Development | 38% | 25% | 20% | 17% | 18% |
+----------------------------+--------+--------+--------+--------+--------+
| Sales and Marketing | 51% | 43% | 40% | 36% | 35% |
+----------------------------+--------+--------+--------+--------+--------+
| General and Administrative | 31% | 27% | 23% | 24% | 43% |
+----------------------------+--------+--------+--------+--------+--------+
| Operating Margin | -19% | 5% | 16% | 23% | 6% |
+----------------------------+--------+--------+--------+--------+--------+
The Customer Specific numbers get pretty interesting. As expected based off the revenue numbers above, Teledoc’s US paid visit numbers actually show a drop from 0.8 Million in Q2 to 0.68 Million in Q3, a 15% decline. Total US paid memberships dropped slightly from 52 million to 51.5 million between Q2 and Q3 as well. Again, this comes back to a question I have about demand for the actual paid services. I guess you could pin that on a number of different potential issues, such as, say, a lack of educating patients about the value of a paid telehealth visit, but that is just conjecture unless this was asked and answered by Teledoc on an earning call or otherwise. Needless to say, I’ll be keeping a very close eye on these numbers going forward.
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| | Q319 | Q419 | Q120 | Q220 | Q320 |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| Total Patient Visits (millions) | 0.928 | 1.2 | 2 | 2.8 | 2.8 |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| Paid Member + Paid Visit (US) (millions) | | 0.441 | 0.648 | 0.8 | 0.68 |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| Total US Paid Memberships | | 36.7 | 43 | 52 | 51.5 |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| Membership Utilization % | | 9.49% | 13.36% | 16.00% | 16.50% |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| Platform Enabled Sessions (virtual voice/video) (millions) | | | | | 0.986 |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| | | | | | |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| Customer Growth (QoQ)(Total US Paid Memberships) | | | 17% | 20% | 0% |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
| Customer Growth (QoQ)(Paid Visits US) | | | 47% | 23% | -15% |
+------------------------------------------------------------+-------+-------+--------+--------+--------+
Livongo breaks out their customers into “Livongo for Diabetes” members and “Livongo Clients”. On the former, here’s what Livongo says - “We believe our ability to grow the number of enrolled diabetes members is an indicator of penetration of our flagship solution, Livongo for Diabetes. We define our enrolled diabetes members as all individuals that are enrolled in Livongo for Diabetes at the end of a given period.”
In addition, here’s what Livongo says about how they define “Clients”, and there is an interesting backward-looking (2020) comment I will put in bold that impacts the numbers - “We define our clients as business entities that have at least one active paid contract with us at the end of a particular period. Entities that access our platform through our channel partners, such as PBMs and resellers, are counted as individual clients. Historically, we have treated our partnerships with health plans as a single client because of the relatively small number of employers who enrolled under those plans, though multiple employers may contract for our services through a single health plan. Because of the increase in the number of employers who are enrolling through health plans instead of other channels, beginning with the first quarter of 2020 we believe that it is more appropriate to treat health plans in the same manner as we treat our channel partners, such as PBMs and resellers, and include entities who enroll in our platform through a health plan as separate clients. The historical information presented has been revised to include such entities as individual clients. We do not count our channel partners, such as PBMs, health plans, or resellers as clients, unless they also separately have active paid contracts for our solutions. If business units or subsidiaries of the same entity enter into separate agreements with us, they are counted as separate clients. However, entities that have purchased multiple solutions through different contracts are treated as a single client.”
So, I’m not sure how much of an impact from Q419 to Q120 was had on their re-defining what a “client” is, but clearly the 55% sequential growth in Q120 isn’t organically that high. Still, they’ve had positive sequential growth through Q3.
+---------------------------------------------+-------+-------+------+------+------+
| | Q319 | Q419 | Q120 | Q220 | Q320 |
+---------------------------------------------+-------+-------+------+------+------+
| Livongo for Diabetes Members (thousands) | 207.8 | 223 | 328 | 410 | 442 |
+---------------------------------------------+-------+-------+------+------+------+
| Livongo Clients (thousands) | 0.771 | 0.804 | 1.25 | 1.33 | 1.4 |
+---------------------------------------------+-------+-------+------+------+------+
| | | | | | |
+---------------------------------------------+-------+-------+------+------+------+
| Customer Growth (QoQ)(Livongo for Diabetes) | | 7% | 47% | 25% | 8% |
+---------------------------------------------+-------+-------+------+------+------+
| Customer Growth (QoQ)(Livongo Clients) | | 4% | 55% | 6% | 5% |
+---------------------------------------------+-------+-------+------+------+------+
So how about guidance for Q4? Teledoc guided to $304 million in revenue at the top end, which would represent a 5% sequential growth number off of Q3. Teledoc has beaten their revenue guidance by 7%, 5%, and 1% respectively the last 3 quarters. However, they guided to total US Paid Memberships of 51 million at the top end, which would basically be flat for the 3rd straight quarter. Why aren’t they generating more paid memberships during a pandemic? That makes me pretty nervous without an explanation to be quite honest, and certainly is going to factor into my decision making on TDOC going forward.
Speaking of going forward, what relevant information has TDOC and LVGO given us beyond the Q3 numbers leading into 2021 that we can pick apart at evaluate? Well, Teledoc participated in 2 Annual Healthcare Conferences at the end of 2020 - the Credit Suisse conference on November 11th and the Piper Sandler conference on December 1st.
Seeking Alpha has both transcripts respectively - https://seekingalpha.com/article/4388185-teladoc-health-inc-…. https://seekingalpha.com/article/4392289-teladoc-health-inc-….
My highlights from the Credit Suisse conference….
CFO Mala Murthy - “we are seeing that in the anxiety that our consumers have through the pandemic and the robustness of the demand” - my question is, then where is the paid membership growth to back that up?
CEO Jason Gorevic - ”we estimate the U.S. addressable market at about $121 billion, which includes about $47 billion of TAM relative to the Livongo diabetes and hypertension programs”
CEO Jason Gorevic - ” the hospitals and health systems I’m talking to are really interested in taking advantage of the technology and the data science underpinning the Livongo capabilities. And that’s a market that the Livongo team hadn’t yet penetrated……….And then, you combine that with the InTouch platform’s ability to reach out to the consumer in the comfort of their own home. That’s a really killer combination” - More on the InTouch acquisition they did in July 2020 - https://ir.teladochealth.com/news-and-events/investor-news/p…
CEO Jason Gorevic - ”based on the data that we were seeing and gave an outlook of 30% to 40% growth in '21. And we weren’t naïve to the fact that there was going to be a vaccine…”
CEO Jason Gorevic - ”the significant increase in visits for non-infectious diseases, right, things like hypertension, lower back pain, anxiety, depression, that now represents 55% of our visits”
CFO Mala Murthy - “We have talked about how we intend to continue to invest advertising and marketing, with keeping pace with revenue growth. So, I would say, we are continuously priming the pump, if you will, to engage with our customers such that we can help that utilization.” - It is true that their utilization numbers have improved, and this is a good sign that they are focused on improving it more.
CFO Mala Murthy - “I’d encourage you all to focus really more on the overall visit revenue and the growth that we’re seeing. Because at the end of the day, that is really what fuels our revenue scaling.” - I expect better trends than US Paid visits declining in Q3, so IDK about this comment.
CEO Jason Gorevic on Mental Health - ”The BetterHelp business has been growing at a really, really strong rate. We don’t break it out. So, I won’t get too specific. What we’ve said previously, way back in the beginning of March, the last sort of large in-person meeting I can remember being at, which was our Investor Day, we said that it was over $100 million last year, and we expected it to grow over 50% this year. We absolutely delivered on that”
CEO Jason Gorevic - ”I think, the ability for us to make hospital in the home come to life for a provider is exactly the intersection of the Livongo and the InTouch technology that opens up those possibilities and maximizes the impact that the hospital or health system can have.”
CEO Jason Gorvic on their Virtual Primary Care Pilot - ”I think some interesting learnings, really diverse set of diagnoses, over 70 diagnoses, many first diagnoses of things like hypertension, pre-hypertension, diabetes, pre-diabetes. I think 43% of the hypertension or pre-hypertension diagnoses were first time diagnoses. So, the opportunity for us to really make a difference and catch something early, and then bring to bear those Livongo capabilities is really powerful. A lot of overlap of mental health and physical health, where the virtual PCP, if you will, has referred into some of our behavioral health offerings and gotten the consumer started on a course of therapy and maybe brought in a psychiatrist as well to assist with medication management. So, there are really powerful results there. From a satisfaction perspective – member satisfaction perspective, it’s off the charts. I mean, literally, over 90 net promoter score, which is almost unheard of anywhere………This is a very representative cross-section of the population. It tends to be a lot of people who didn’t necessarily have a primary care relationship previously, which is roughly 50% of the population. So, there’s a tremendous addressable market there. And when you talk about the economics, the economic opportunity is massive”
My highlights from the Piper Sandler conference -
CEO Jason Gorvic on Livongo+InTouch - ”Enterprises are looking for a single solution that can enable a physician to provide virtual care to the bedside in the hospital, but also the bedside in the home, all from a single interface, from a single technology platform………As soon we announced the Livongo acquisition, our hospital and health system clients came to us saying, “When can we get access to that such that we can discharge our patients with a blood pressure cuff, with a blood glucose monitor with a connected scale, take advantage of the underlying data science, and then intervene on the InTouch platform – the Teladoc InTouch platform if we need to connect with the patient directly in their home?” So, really delivering on that promise of hospital in the home………from a selling perspective, obviously, one sales force selling the full suite of all three companies’ products is significantly more efficient. And it gives our sales force, quite frankly, the full credit answer for the hospital and health system buyer. It moves us up strategically in the organization, because now it becomes an enterprise-wide strategic purchase as opposed to a pure technology purchase………from a product perspective, it also brings our extensive network of physicians to supplement the hospital and health system providers, who are – those, they have finite workforces, right? So, they have scarce resources, and we bring our physicians to supplement their physician network for additional surge capacity, for after-hours coverage, for nights and weekends, and for additional specialties……Livongo had a lot of hospital clients, where they served their employee population, but weren’t really activated for their patient population………the ability to discharge the patient with the blood glucose monitor or the blood pressure cuff, but then not only send them digital health nudges, which are appropriate for a moderate or minor or temporal blip in their readings, but also then enable the treating physician to connect to the patient via the InTouch telehealth platform, that really completes the last mile of delivering care to know whether that patient needs to have their medication titrated, their prescription modified, or they need to be examined and then brought back into the facility.”
Ok, so a lot of this, as typical from a CFO/CEO at an investor conference, sounds really really promising, and reinforces some of the longer term thesis for me. But they still have to back the talk up with real numbers, and there are some holes that I think they need to plug and concerns to assuage heading into 2021 that I hadn’t quite seen prior to digging into the numbers this deeply.
I’m also here to say that, since the announcement of the merger, the stock performance has been down slightly, and I’m not here to argue the fact that many of our other stocks have severely outperformed it. It’s easily been the weakest performer in my portfolio. That’s just stone cold facts and is what it is. Maybe that’s based on some of the information presented above. I still like the long term thesis and vision, but strictly on the results alone, if I knew now what I did back when the merger was announced and after the Q3 earnings for both companies, I probably wouldn’t have carried at 7.5% position and would have at least trimmed it.
How is Teledoc going to break out the Livongo numbers in 2021? That isn’t something I’ve heard them comment on, so if anyone has any additional insight there I’d love to hear it.
-Chris