The Uber Of Healthcare

Summary

• Teladoc Health has recently weathered damaging controversies, including the departure of their CFO following alleged misconduct.
• The company remains poised to capture a growing trend in online healthcare.
• Revenues continue to grow at breakneck speeds, although their growth should decline as temporary gains from acquisitions subside.
• Because the company has yet to demonstrate sustained earnings, may have low quality revenue growth, and faces regulatory hurdles, the stock remains a speculator's venture.

Source: Ithaca College Employee Benefits Homepage

Teladoc's Recent Turmoil

Teladoc (NYSE:TDOC) has recently found itself at the center of controversies that have weighed heavily on the stock. In addition, broader market weakness has done investors no favors. With shares down nearly 50% from their highs, is now the time to commit capital to this explosive stock in a nascent, rapidly growing industry?

Global telemedicine market size from 2015 to 2021 (in billions of USD)

Source: Statista.com

How They Make Money

Teladoc generates its revenues primarily through a per-member-per-month, subscription based model; the services of which it offers to its clients (subscribers) who then include telemedicine as a part of their health package that they offer to their members, i.e. employees, card holders, beneficiaries, etc.

"The Company [Teladoc] generates virtual healthcare service revenue from contracts with clients who purchase access to the Company’s professional provider network or medical experts for their employees, dependents and other beneficiaries."

Additionally, Teladoc generates revenue through "visit fees" on a per-telehealth general medical and specialty visit basis, similar to what one would find in paying a co-pay when going to a traditional doctor.

"Subscription access fees are paid by our Clients on behalf of their employees, dependents, policy holders, card holders, beneficiaries or themselves, while general medical and other specialty visit fees are paid by either Clients or Members."

Lastly, in their most recent 10-Q, the company states, "We also generate revenue from Members of our direct-to-consumer behavioral health product on a subscription access fee basis."

Source: Teladoc's 3rd Quarter 10-Q

As for what constitutes services provided, the company writes in its latest 10-Q, "Revenues are recognized when the Company satisfies its performance obligation to stand ready to provide telehealth services which occurs when the Company’s clients and members have access to and obtain control of the telehealth service."

Explosive Revenue Growth

Teladoc's top line growth has been nothing short of incredible heretofore; however, they are still a long way from producing a worthwhile, predictable profit. While strong profits are still not within sight, management has promised that they will be cash flow positive for their fiscal year 2019 (slide 106).

Teladoc's revenues have grown at a CAGR of 75% over the last five years, which has drawn the skeptical eyes of many short sellers and bulls alike. In that same time period, organic revenue only grew at a CAGR of 29%, and if you dig deeper into their filings, you'll find stats that dampen the growth party to an even greater extent, like the paltry U.S. subscription growth. "U.S. paid membership was 22.6 million on September 30,2018, compared to 19.1 million (adjusted for the 3.5 million Aetna lives) on September 30, 2017." Hardly blockbuster subscription growth.

Acquisitions have inflated revenue growth over the past 5 years, and management has been, reassuringly, forthright about the effect of acquisitions on the company's top line and their realistic expectations for target future revenue growth (projected to be between 20% and 30% - Slide 107).

Source: Teladoc Investor Day Presentation (9/27/18)

Such explosive growth has been the byproduct of a few factors:

1. Growing usage on their platforms
2. An advertising blitz on which they've spent massive sums of money
3. Accretive acquisitions (The revenue of which is reflected in the above chart.)

Growing Usage On Their Platforms

Almost in lockstep with Teladoc's exploding revenues, usage on their various platforms has seen immense growth over the last 5 or so years.

Source: Teladoc Investor Day Presentation (9/27/18)

In order to achieve this level of customer visit growth, Teladoc distributes its products and services through three channels seen below:

• Channel Partners
• B2B Direct
• Direct to Consumer

Source: Teladoc Investor Day Presentation (9/27/18)

And through these three channels, Teladoc does business with a variety of major players as shown below.

Source: Teladoc Investor Day Presentation (9/27/18)

The chart above depicts Teladoc's strategic partnerships, delineated by their respective channels of distribution. Of great note are the partnerships with major insurance companies, CVS Health (CVS), and companies such as Microsoft (MSFT).

Additionally, Teladoc boasted in their September Investor Day Presentation that in 2020 they will begin a partnership with the Center of Medicare and Medicaid Services [CMS].

Source: Teladoc Investor Day Presentation (9/27/18)

Although their primary risks, from my perspective and according to their SEC filings, are regulatory, it is reassuring to see that they're getting the nod from the U.S. government through their partnership with CMS.

"The U.S. market is taking off with coverage expanding in the private sector thanks to big insurers like UnitedHealth Group, Anthem and the coming expansion of telehealth coverage under Medicare health insurance for the elderly. Such insurance coverage has been a boon to companies like Teladoc and rivals American Well and MDLive," wrote Forbes' Bruce Japsen.

Telemedicine has been found to be extremely useful for the elderly who have trouble with mobility. Additionally, citizens who are enrolled in medicaid likely cannot often afford transportation. For both of these reasons, telemedicine offers a perfect solution, from which Teladoc seems poised to profit.

The Ad and Marketing Blitz

Teladoc's gross margins are actually quite good. Their cost of goods sold as a percentage of their revenues has stood at about 30-35% annually.

Source: Teladoc's 3rd Quarter 10-Q

Teladoc's 3rd quarter 10-Q reveals that they're spending aggressively on "Advertising and Marketing", "Sales", and "Technology and Development"; the amount of which has ballooned massively, or at least proportionately, to their revenues.

This may seem normal on the surface, but some short sellers have taken great issue with the methods by which Teladoc has been executing their ad and marketing campaigns. I discuss the ad spend and marketing techniques in greater depth later in this article, and I would highly recommend any potential investor to read the link provided in this paragraph.

Growth Through Acquisitions

The acquisitions of HealthiestYou, Best Doctors, Advance Medical have increased revenues as well as global reach. The latest acquisition of Advance Medical has given it a global exposure, which should enable it to harness the international markets.

• HealthiestYou
• Best Doctors
• Advance Medical

Source: Teladoc Investor Day Presentation (9/27/18)

There are a few points of note to mention with respect to the above graph. 1) Teladoc's behavior health arm is predominantly composed of their controversial app known as "BetterHelp". 2) This is the best I can find regarding all of their individual acquisition's contributions to their overall sales, which, from my viewpoint, is damaging to their overall narrative, and the lack of transparency gives the short sellers fodder for their own narratives.

With the data Teladoc provides, we can infer that these acquisitions have contributed to overall sales growth, but to what extent has each contributed? Is BetterHelp generating the majority of its revenues bolstered by aggressive ad campaigns on the backs of YouTubers who no longer want to be associated with the company? These questions regarding Teladoc's revenues have created speculation and uncertainty around the entire company's narrative.

Financials And The Questions Surrounding Them

• Quality of revenues remains uncertain in light of BetterHelp scandal.
• Reduction in revenue reporting transparency bolsters the argument that Teladoc may have something to hide regarding its BetterHelp revenues.

Teladoc's top line has been growing astronomically due in large part to the aforementioned acquisitions. While their financial performance lately would excite many an investor, despite the company having not turned a GAAP basis profit yet, serious concerns have arisen regarding their revenues and the quality thereof.

Quality of revenues remains uncertain

• The quality of the company's revenue has been called into question, rightfully so, by fellow SeekingAlpha contributors, and in light of the magnitude of their marketing/sales spend and the lawsuit alleging aggressive practices, the skepticism is certainly warranted.

The primary thesis of the short seller referenced in the above link is that their subscription access fee growth (their primary organic revenue driver) is coming from an app known as "BetterHelp". Essentially, BetterHelp provides on-demand therapy services via an app on a phone or computer.

The aforementioned bear stated that he or she believed that the BetterHelp mental health services services have been ineffective, but due to Teladoc's massive marketing campaign, they've been able to generate massive low quality revenue in a relatively short period of time of about 3 years.

In his article, he writes, "Teladoc acquired BetterHelp in January 2015 in order to enter the mental health market. Since the acquisition, BetterHelp revenues have exploded from almost zero to a projected $60 million in FY18."

Teladoc released in 2015 information regarding their BetterHelp acquisition.

"In January 2015, we completed the acquistion of BetterHelp, a provider of direct-to-consumer, behavioral health services for $3.5 million in cash."

BetterHelp's revenues are nearly impossible to determine, as the company has reduced the transparency with which they report their revenues, making it harder to follow the paper trail of sales.

In an attempt to gain some clarity as to BetterHelp's contributions to the company's financials, I scoured a couple of their latest 10-Qs.

Here's what I found:

For Teladoc's 2018 2nd Quarter 10-Q, the company reported "Visit Fee Revenue" as defined as "U.S. General Medical, Dermatology, and Behavioral Health". Now recall that Teladoc stated in 2015, "...we completed the acquistion of BetterHelp, a provider of direct-to-consumer, behavioral health services..." Therefore, I feel it's acceptable to assume that their revenue from "Behavioral Health", seen below, represents the sales from BetterHelp.

Has Teladoc stated as much explicitly? Not that I've read, nor have they alluded to any of it in their Investor Day presentations.

Source: Teladoc's 2nd Quarter 10-Q

Now here's where it gets a little weird, and here's where our fellow Seeking Alpha contributor's indictment of Teladoc gains even more credibility.

Source: Teladoc's 3rd Quarter 10-Q

Teladoc has actually reduced its transparency, despite criticism and skepticism regarding their revenues. As can be seen above, they no longer report their Visit Fee Revenue as "U.S. General Medical, Dermatology and Behavioral Health".

So now more questions arise: Teladoc claims that "For the Company’s direct-to-consumer behavioral health product, members purchase access to the Company’s professional provider network for a subscription access fee."

Based on that quote alone, it seems we could assume that Teladoc's "Subscription Access Fees" revenue account for BetterHelp's sales. But in the 2018 2nd Quarter 10-Q, Behavioral Health revenue was a sub-revenue to "Visit Fee Revenue".

Why did Teladoc stop reporting their "Visit Fee Revenue" with sub categories? Why wasn't behavior health represented under "Subscription Access Fees", and why was it represented under "Visit Fee Revenue" when it uses the subscription model?

Now, I'm far from perfect, and there's a prodigious amount of information one must consume in order to gain clarity as to a company's operations; however, it seems Teladoc either hasn't done a good job in producing quality, easily comprehensible information regarding its revenues, or my SeekingAlpha compatriots and I are missing something.

Reduction in revenue reporting transparency furthers uncertainty

• Without greater transparency in their reporting, the company remains a highly speculative investment from my vantage point, and unfortunately, further evidence of sustainable revenue growth is needed for me to highly recommend the stock at any valuation.

In one sense, Teladoc's high gross margins reassure me as an investor that the business model is one in which to invest; on the other hand, I cannot be sure as to the sustainability or quality of the revenues, as, apparently, the company seems to have something to hide regarding its revenues.

In light of the recent Apple news, reduction in reporting transparency is usually a huge red flag.

Risk Factors

There are numerous risks associated with investing in a company whose earning potential has not been proven and whose business model is still in question. Aside from the financial concerns associated with investing in a company that's losing money, one must also consider the political environment in which a company such as Teladoc operates.

The primary risks to investing in the company, from my perspective, are as follows:

• Regulatory risks

Perusing the company's 2017 10-K, in which they list their risk factors, will quickly inform you as to the many hurdles the company has had to overcome to achieve compliance with the healthcare laws of the 125 countries where it operates.

• Financial solvency

The ability of a new company to meet its obligations is always of central concern for investors. At present, Teladoc's financial position could be considered a strength; however, investors must consider that they have not had the ability to build cash balances that could shield them from economic uncertainty for long periods of time.

The company does maintain a liquid cash position, carrying around a half billion in cash on their balance sheet. Additionally, they have two notes which mature in the 2020s. These notes are convertible, meaning in this instance that the lender has the option to convert under certain circumstances, as delineated in the most recent 10-Q. Additionally, Teladoc has reserved shares for issuance under their convertible debt covenants; therefore, the notes should be converted at a point in the future.

Source: Teladoc Investor Day Presentation (9/27/18)

Thus, liquidity is no issue for the company for the foreseeable future, and should global political and economic risk send the world's economies into recession, the company should weather the storm with minimal threat to its survival as a going concern.

• Lack of transparency

Teladoc's aggressive advertising/sales spend and questionable marketing techniques have called into question the quality of their revenues via a fellow SeekingAlpha contributor's short thesis.

The author, who writes riveting and compelling articles which I recommend to any investor considering buying Teladoc, cited certain social media scandals in which Teladoc sponsored content creators to peddle BetterHelp. He continued stating that "BetterHelp" now accounts for nearly 70% organic user growth of subscription services and $60 million of overall revenues, the numbers of which don't add up perfectly in my calculations, but nevertheless are compelling.

He speculated, and I use that word strongly because either way we look at it Teladoc simply hasn't given us enough data with which to make an informed decision, that revenues should begin to collapse as the social media scandal wrecks the BetterHelp business, which, according to him, makes up $60 million of current revenues.

I invite readers to conclude for themselves the validity to his claims. I checked out the BetterHelp app for myself, and after extensive research, found that it's actually a pretty darn unique innovation in mental healthcare. In fact, it inspired the title of this article because I found that its business model is incredibly similar to that of Uber (UBER), the ride hailing app.

Though I remain skeptical, actually experiencing BetterHelp's app actually made me more excited to buy shares of Teladoc. Check it out for yourself. It is available in the Google Play store on Android and the App store on IOS.

• Commoditizing the product by companies such as CVS

A common threat to Teladoc's business model has been the idea that companies such as CVS and Walgreen's (WBA) will easily replicate its services. It seems that Teladoc has provided the death knell for that bearish thesis through their partnership with CVS' MinuteClinic , although Walgreens did release a competing product called "Find Care Now".

Takeaway

Teladoc offers a compelling narrative, relatively strong financials, and investment in an industry that is rapidly growing; however, the company still has work to do in order to engender investor confidence. From their lack of financial transparency regarding their sources of growth; to their CFO's recent alleged misconduct; to lawsuits they currently face: there are serious issues within the company that need to be addressed.

Additionally, the BetterHelp scandal has been a nightmare for the company, and their alterations to the way in which they report their revenues seems to be a means to get ahead of a decline in revenues from the online mental health service. This is speculation, but Teladoc has not been forthcoming with information regarding the controversies and their impacts on revenues.

With all of that being said, I'm a believer in the power that virtual healthcare can bring to consumers and to their employers and to beneficiaries of government sponsored healthcare. The company appears to have backing from the U.S. federal and state governments through their future CMS partnership (shown on slide 13 of the cited presentation), which is set to begin in 2020. Additionally, the company is disrupting a notoriously inefficient industry that has taken advantage of consumers for decades now, similar to the impact Uber has had on the taxi industry.

To commit capital to Teladoc today would unequivocally be a speculative wager predicated on future adoption by consumers, acceptance by regulators, and execution of a management that has already created mistrust through its indiscretions.

With that being said, I am long TDOC, having built a position that amounts to around 1% of my entire portfolio.

Disclosure: I am/we are long TDOC, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.