Teladoc Health, Inc.: Form 10-Q for the period ended Mar 31, 2024

Special Note Regarding Forward-Looking Statements

Many statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipates,” “believes,” “suggests,” “targets,” “projects,” “plans,” “expects,” “future,” “intends,” “estimates,” “predicts,” “potential,” “may,” “will,” “should,” “could,” “would,” “likely,” “foresee,” “forecast,” “continue” and other similar words or phrases, as well as statements in the future tense to identify these forward-looking statements. These forward-looking statements and projections are contained throughout this Form 10-Q, including the section entitled” “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties, and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include, but are not limited to, the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”) and in our other reports and U.S. Securities and Exchange Commission (“SEC”) filings. These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.

Overview

Teladoc, Inc. was incorporated in the State of Texas in June 2002 and changed its state of incorporation to the State of Delaware in October 2008. Effective August 10, 2018, Teladoc, Inc. changed its corporate name to Teladoc Health, Inc. Unless the context otherwise requires, Teladoc Health, Inc., together with its subsidiaries, is referred to herein as “Teladoc Health,” the “Company,” or “we.” The Company’s principal executive office is located in Purchase, New York. Teladoc Health is the global leader in whole person virtual care focused on forging a new healthcare experience with better convenience, outcomes, and value around the world.

We were founded on a simple, yet revolutionary idea: that everyone should have access to the best healthcare, anywhere in the world on their terms. Today, we have a vision of making virtual care the first step on any healthcare journey, and we are delivering on this mission by providing whole person virtual care that includes primary care, mental health, chronic condition management, and more.

Key Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

As it relates to the Integrated Care segment:

Number of U.S. Integrated Care Members. U.S. Integrated Care members represent the number of unique individuals who have paid access and visit fee only access to our suite of integrated care services in the U.S. at the end of the applicable period. Our revenue growth rate and long-term profitability are affected by our ability to increase cross selling capability among our existing members over time because we derive a substantial portion of our revenue from access and other fees via Client contracts that provide members access to our professional provider network in exchange for a contractual based periodic fee. Therefore, we believe that our ability to add new members and retain existing members, and to increase utilization and penetration further into existing and new health plan and employer Clients is a key indicator of our increasing market adoption, the growth of our business, and our future revenue potential. We further believe that increasing our membership is an integral objective that will provide us with the ability to continually innovate our services and support initiatives that will enhance members’ experiences. U.S. Integrated Care members increased by 6.9 million, or 8%, to 91.8 million at March 31, 2024, compared to the same period in 2023.

Chronic Care Program Enrollment. Chronic care program enrollment represents the total number of enrollees across our suite of chronic care programs at the end of a given period. Our chronic care program enrollments are one of the key components of our whole person virtual care platform that we believe positions us to drive greater engagement with our platforms and increased revenue. Chronic care program enrollment increased by 9% to 1.12 million at March 31, 2024, compared to 1.03 million at March 31, 2023.

Average Monthly Revenue Per U.S. Integrated Care Member. Average monthly revenue per U.S. Integrated Care member measures the average monthly amount of global revenue that we generate from a U.S. Integrated Care member for a particular period. It is calculated by dividing the total revenue generated from the Integrated Care segment by the average number of U.S. Integrated Care members during the applicable period. Approximately 20% of total Integrated Care revenues relates to international and hospital and health systems for which membership is not considered as a management metric. We believe that our ability to increase the revenue generated from each member over time is also a key indicator of our increasing market adoption, the growth of our business, and future revenue potential. Average monthly revenue per U.S. Integrated Care member was $1.38 in the three months ended March 31, 2024, compared to $1.39 in the same period in 2023. The change in average monthly revenue versus the indicated prior period is reflective of the growth of onboarding new members and the timing and mix of when fees are realized.

As it relates to the BetterHelp segment:

BetterHelp Paying Users. BetterHelp paying users represent the average number of global monthly paying users of our BetterHelp therapy services during the applicable period. We believe that our ability to add new paying users and retain existing users is a key indicator of the market adoption of BetterHelp, the growth of that business, and future revenue potential. BetterHelp paying users decreased by 11% to 0.42 million for the three months ended March 31, 2024, compared to 0.47 million for the three months ended March 31, 2023.

As it relates to the Company:

Seasonality. Our business has historically been subject to seasonality. In our Integrated Care segment, a concentration of our new Client contracts have an effective date of January 1 as a result of many Clients’ introduction of new services at the start of each calendar year. Therefore, while membership increases, utilization and enrollment rates are dampened until service delivery ramps up over the course of the year. In addition, as a result of seasonal cold and flu trends, we historically have experienced our highest level of visit and other fee revenue during the first and fourth quarters of each year.

Due to the higher cost of customer acquisition during the end-of-year holiday season, our BetterHelp segment has historically reduced marketing activity during the fourth quarter. As a result of this dynamic, we have typically experienced fewer new member additions and the strongest operating income performance in the fourth quarter. Conversely, as marketing activity typically resumes at the start of the year, we typically experience the weakest operating income performance during the first quarter as new customer acquisition and revenue growth lags marketing spend.

Critical Accounting Estimates and Policies

Our discussion and analysis of our results of operations, liquidity and capital resources are based on our condensed consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, business combinations, goodwill and other intangible assets, income taxes, and other items. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our results of operations and financial position. For a discussion of our critical accounting policies and estimates see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Form 10-K.

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with GAAP, we use non-GAAP financial measures to clarify and enhance an understanding of past performance, which include EBITDA (as defined below), Adjusted EBITDA, and free cash flow. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance, and are commonly used by investors to evaluate our performance and that of our competitors. We further believe that these financial measures are useful financial metrics to assess our operating performance and financial and business trends from period-to-period by excluding certain items that we believe are not representative of our core business, and that free cash flow reflects an additional way of viewing our liquidity that, when viewed together with GAAP results, provides management, investors, and other users of our financial information with a more complete understanding of factors and trends affecting our cash flows. We use these non-GAAP financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as a key measure of our performance.

EBITDA consists of net loss before interest income; interest expense; other expense (income), net, including foreign currency exchange gains or losses; provision for income taxes; amortization of intangible assets; and depreciation of property and equipment. Adjusted EBITDA consists of net loss before interest income; interest expense; other expense (income), net, including foreign currency exchange gains or losses; provision for income taxes; amortization of intangible assets; depreciation of property and equipment; stock-based compensation; restructuring costs; and acquisition, integration, and transformation costs.

Free cash flow is net cash provided by operating activities less capital expenditures and capitalized software development costs.

Our use of these non-GAAP terms may vary from that of others in our industry, and other companies may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Non-GAAP measures have important limitations as analytical tools and you should not consider them in isolation, and they should not be considered as an alternative to net loss before provision for income taxes, net loss, net loss per share, net cash from operating activities or any other measures derived in accordance with GAAP. Some of these limitations are:

• EBITDA and Adjusted EBITDA eliminate the impact of the provision for income taxes on our results of operations, and they do not reflect interest income, interest expense or other expense (income), net;
• Adjusted EBITDA does not reflect restructuring costs. Restructuring costs may include certain lease impairment costs, certain losses related to early lease terminations, and severance;
• Adjusted EBITDA does not reflect significant acquisition, integration, and transformation costs. Acquisition, integration and transformation costs include investment banking, financing, legal, accounting, consultancy, integration, fair value changes related to contingent consideration and certain other transaction costs related to mergers and acquisitions. It also includes costs related to certain business transformation initiatives focused on integrating and optimizing various operations and systems, including upgrading our CRM and ERP systems. These transformation cost adjustments made to our results do not represent normal, recurring, operating expenses necessary to operate the business but rather, incremental costs incurred in connection with our acquisition and integration activities; and
• Adjusted EBITDA does not reflect the significant non-cash stock-based compensation expense which should be viewed as a component of recurring operating costs.

In addition, although amortization of intangible assets and depreciation of property and equipment are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect any expenditures for such replacements.

We compensate for these limitations by using these non-GAAP measures along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include net loss, net loss per share, net cash provided by operating activities, and other performance measures.

In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of these non-GAAP measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

Condensed Consolidated Results of Operations

The following table sets forth our Condensed Consolidated Statements of Operations data for the three months ended March 31, 2024 and 2023 and the dollar and percentage change between the respective periods (in thousands, except per share data):

(1) Non-GAAP Financial Measures

The following table reconciles net loss, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA for the three months ended March 31, 2024 and 2023 (in thousands):

Revenue. Total revenue was $646.1 million for the three months ended March 31, 2024, compared to $629.2 million during the three months ended March 31, 2023, an increase of $16.9 million, or 3%. This increase in revenue was driven substantially by higher visit revenues in our Integrated Care segment. Total access fees were $557.2 million for the three months ended March 31, 2024, compared to $550.9 million for the three months ended March 31, 2023, an increase of $6.3 million, or 1%. Other revenue, which predominately includes visit fees and, to a lesser extent, revenue from the sales of our telehealth solutions for hospitals and health systems, was $89.0 million for the three months ended March 31, 2024, compared to $78.4 million for the three months ended March 31, 2023, an increase of $10.6 million, or 14%, primarily related to higher visit revenue. For the three months ended March 31, 2024, 86% of our revenue was derived from access fees and 14% was derived from other revenue, consistent with the three months ended March 31, 2023. By geography, U.S. revenue grew 1% to $547.6 million and International revenue grew 13% to $98.5 million compared to the three months ended March 31, 2023.

Cost of Revenue (exclusive of depreciation and amortization, which are shown separately below). Cost of revenue was $194.5 million for the three months ended March 31, 2024, compared to $190.1 million for the three months ended March 31, 2023, an increase of $4.4 million, or 2%. The increase was primarily driven by higher costs associated with the growth in revenue and higher amortization of device costs, offset by lower physician costs, reflecting various operation optimization efforts to reduce provider costs and overall product mix.

Advertising and Marketing Expenses. Advertising and marketing expenses were $183.3 million for the three months ended March 31, 2024, compared to $176.8 million for the three months ended March 31, 2023, an increase of $6.5 million, or 4%, driven mainly by higher engagement marketing in our Integrated Care segment and higher digital and media advertising costs in our BetterHelp segment.

Sales Expenses. Sales expenses were essentially flat at $54.4 million for the three months ended March 31, 2024, compared to $54.5 million for the three months ended March 31, 2023. This reflects lower costs related to sales conferences and events and commissions, offset by higher employee compensation.

Technology and Development Expenses. Technology and development expenses were $81.4 million for the three months ended March 31, 2024, compared to $87.0 million for the three months ended March 31, 2023, a decrease of $5.6 million, or 6%. This decrease reflects lower employee compensation costs and contract labor costs, offset by higher infrastructure and hosting costs associated with running operations and ongoing projects and services to continuously improve and optimize our products and services. For the three months ended March 31, 2024 and 2023, research and development costs, which exclude amounts reflected as capitalized software development costs, were $24.8 million and $30.4 million, respectively.

General and Administrative Expenses. General and administrative expenses decreased $2.4 million, or 2%, to $111.7 million for the three months ended March 31, 2024, compared to $114.1 million for the three months ended March 31, 2023. The decrease was primarily driven by lower therapist onboarding costs, bad debt reserves, indirect taxes, insurance costs, employee compensation costs, and bank fees, partially offset by higher corporate software and infrastructure costs, legal costs, consultation costs, occupancy costs, and travel expenses.

As a result of the termination of the former Chief Executive Officer, we expect to recognize approximately $6.4 million of related costs in the three months ending June 30, 2024, with $1.2 million for cash severance costs and $5.2 million for stock-based compensation.

Acquisition, Integration, and Transformation Costs. Acquisition, integration, and transformation costs were $0.4 million and $5.9 million for the three months ended March 31, 2024 and 2023 respectively, and primarily consisted of costs to integrate and upgrade our CRM and ERP ecosystem.

Restructuring Costs. Restructuring costs for the three months ended March 31, 2024 were $9.7 million, of which $7.0 million was for employee transition, severance, employee benefits, and related costs and $2.7 million was for other restructuring related costs. Restructuring costs for the three months ended March 31, 2023, were $8.1 million which primarily consisted of employee transition, severance, employee benefits, and related costs.

Amortization of Intangible Assets.

The following table shows amortization of intangible assets broken down by components for the periods indicated (in thousands):

Amortization of intangible assets was $95.1 million for the three months ended March 31, 2024, compared to $66.9 million for the three months ended March 31, 2023, an increase of $28.2 million, or 42%. The higher expense was driven by higher amortization of intangible assets due to the acceleration of amortization associated with the Livongo trademark as well as an increase in the amortization of capitalized software development costs related to our investment in platforms. In the second half of 2023, we initiated a strategy to transition the majority of our chronic condition management Clients and members to the Teladoc Health brand on a phased basis, with a smaller subset continuing to be served under the Livongo trade name beyond 2024. In connection with the brand strategy, we accelerated the amortization of intangible assets that are associated with the Livongo trademark, increasing amortization of intangible assets expense in the year ended December 31, 2023 and in the year ending December 31, 2024, with corresponding reductions thereafter. The change in accounting estimate resulted in additional amortization of intangible expense for acquired intangibles of $18.6 million, or $0.11 per basic and diluted share, for the three months ended March 31, 2024.

Depreciation of Property and Equipment. Depreciation of property and equipment was $2.8 million for the three months ended March 31, 2024, compared to $2.9 million for the three months ended March 31, 2023, a decrease of $0.1 million, or 3%.

Interest Income. Interest income consisted of interest earned on cash and cash equivalents. Interest income was $13.9 million for the three months ended March 31, 2024, compared to $8.9 million for the three months ended March 31, 2023. The increase was primarily driven by higher interest rate yields and an increase in cash and cash equivalent balances.

Interest Expense. Interest expense consisted of interest costs and the amortization of debt discounts primarily associated with the convertible senior notes. Interest expense was $5.6 million for the three months ended March 31, 2024, compared to $5.3 million for the three months ended March 31, 2023.

Other Expense (Income), net. Other expense (income), net was an expense of $0.4 million for the three months ended March 31, 2024, compared to an income of $4.9 million for the three months ended March 31, 2023, primarily reflecting losses on foreign currency exchange rate fluctuations in 2024 and a gain on the partial sale of a business in 2023.

Provision for Income Taxes. We recorded an income tax expense of $2.7 million for the three months ended March 31, 2024, compared to $0.7 million for the three months ended March 31, 2023.

Segment Information

The following tables set forth the results of operations for the relevant segments for the three months ended March 31, 2024 and 2023 (dollars in thousands):

Integrated Care total revenues increased by $27.1 million, or 8%, to $377.1 million for the three months ended March 31, 2024, primarily on higher chronic care results and higher visit revenue in the U.S., as well as strong growth internationally.

Integrated Care Adjusted EBITDA increased by $12.5 million, or 36%, to $47.7 million for the three months ended March 31, 2024, primarily reflecting higher gross profit and flat operating expenses.

BetterHelp total revenues decreased by $10.3 million, or 4%, to $269.0 million for the three months ended March 31, 2024, primarily driven by a 11% decrease in average monthly paying users.

BetterHelp Adjusted EBITDA decreased by $2.2 million, or 12%, to $15.5 million for the three months ended March 31, 2024, primarily reflecting marginally lower gross profit on lower revenues and higher operating expenses.

Liquidity and Capital Resources

The following table presents a summary of our cash flow activity for the three months ended March 31, 2024 and 2023 (in thousands):

30

Our principal sources of liquidity are cash and cash equivalents, totaling $1,097.9 million as of March 31, 2024. During 2023, we experienced positive operating cash flow and we anticipate increasing positive operating cash flow results for 2024.

We believe that our existing cash and cash equivalents will be sufficient to meet our working capital, capital expenditure, and contractual obligation needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, contract renewal activity, number of visits, the timing and extent of spending to support product development efforts, our expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the continuing market acceptance of telehealth, and our debt service obligations. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies, and intellectual property rights. We may be required to seek additional equity or debt financing to fund working capital, capital expenditures and acquisitions, and to settle debt obligations. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all, which would adversely affect our business, financial condition and results of operations.

Historically, we have financed our operations primarily through sales of equity securities, debt issuance, and bank borrowings.

See Note 9. “Convertible Senior Notes” to the condensed consolidated financial statements for additional information on our convertible senior notes.

We were in compliance with all debt covenants at March 31, 2024.

We routinely enter into contractual obligations with third parties to provide professional services, licensing, and other products and services in support of our ongoing business. The current estimated cost of these contracts is not expected to be significant to our liquidity and capital resources based on contracts in place as of March 31, 2024.

Cash from Operating Activities

Cash flows provided by operating activities consisted of net loss adjusted for certain non-cash items and the cash effect of changes in assets and liabilities. Net cash provided by operating activities was $8.9 million for the three months ended March 31, 2024 compared to net cash provided by operating activities of $13.2 million for the three months ended March 31, 2023. The year-over-year change was primarily driven by higher incentive compensation payments, partially offset by growth in the business.

The primary uses of cash from operating activities are for the payment of cash compensation, provider fees, engagement marketing, direct-to-consumer digital and media advertising, inventory, insurance, technology costs, interest expense and acquisition, integration, and transformation costs. Historically, cash compensation is at its highest level in the first quarter when discretionary employee compensation related to the previous fiscal year is paid.

Cash from Investing Activities

Cash used in investing activities was $35.5 million for the three months ended March 31, 2024, and $45.6 million for the three months ended March 31, 2023. Amounts for both periods substantially relate to payments for capitalized software development costs associated with ongoing projects to continuously improve and optimize our products and services.

Cash from Financing Activities

Cash provided by financing activities for the three months ended March 31, 2024 was $1.8 million and $3.4 million for the three months ended March 31, 2023, reflecting lower proceeds from the employee stock purchase plan.

The following is a reconciliation of net cash provided by operating activities to free cash flow (in thousands, unaudited):

Free cash flow was negative $26.6 million for the three months ended March 31, 2024, compared to negative $32.5 million for the three months ended March 31, 2023. Cash flow is typically negative in the first quarter of each year, reflecting the payment of annual bonuses. The year-over-year change was driven by higher incentive compensation payments, partially offset by growth in the business as well as decreases in payments for capitalized expenditures and capitalized software development costs.

Interest Rate Risk and Foreign Currency Exchange Risk

Our cash and cash equivalents are subject to interest rate volatility, which impacts the amount of interest income earned, and represents our principal market risk. A 1% change in interest rates would result in a change of interest income generated from our cash and cash equivalents by approximately $11 million over the next 12 months. We do not expect cash flows related to our convertible senior notes to be affected by a sudden change in market interest rates as they bear fixed interest rates. We do not enter into investments for trading or speculative purposes.

We operate our business primarily within the U.S. which accounts for approximately 85% of our revenues. We have not utilized hedging strategies with respect to our foreign currency exchange exposure as we believe it is not expected to have a material impact on our condensed consolidated financial statements.

Concentrations of Risk and Significant Clients

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Although we deposit our cash with multiple financial institutions in the U.S. and in foreign countries, our deposits, at times, may exceed federally insured limits. Our cash equivalents are primarily invested in institutional money market funds.

No single Client represented over 10% of consolidated revenues for the three months ended March 31, 2024 or 2023. For the Integrated Care Segment, a significant portion of our revenue is derived from large enterprises, mainly health plans. For the three months ended March 31, 2024, revenue from the five largest customers was 31% of total Integrated Care segment revenue. For the BetterHelp segment, there is no significant concentration risk as substantially all revenue is generated from individuals in the direct-to-consumer market.

Management’s Report on Internal Control over Financial Reporting

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Acting Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Acting Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Acting Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For a discussion of potential risks and uncertainties related to our Company see the information in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the “Special Note Regarding Forward-Looking Statements” section in Part I, Item 2, of this Quarterly Report on Form 10-Q.