Teladoc Q3 Earnings: Difficult Quarter, Tough Outlook, Hopes Of A Turnaround (NYSE:TDOC)

Investment Overview

Teladoc Health, Inc. (NYSE:TDOC), the virtual healthcare specialist, announced its Q3 earnings yesterday. First let’s take a look at the headline figures.

Revenues grew 8% year-on-year to $660.2m, and across the first three quarters of 2023, revenues amounted to $1.94bn, up from $1.77bn in the prior year period – a gain of ~10%. Net loss in Q3 was $(57m), or $(0.35) per share, vs. $(73.5m), or $(0.45) per share in Q3 2022, and across the first nine months of 2023, net loss was $(191.5m), or $(1.17) per share, vs. a staggering $(9.85bn) loss – $(61.09) per share in the prior year, although this is primarily attributable to a non-cash impairment charge of $13.4bn.

For the fourth quarter of 2023, Teladoc is guiding for revenues of $658 – $683m, adjusted EBITDA of $107 – $117m, and net loss per share of $(0.33) – $(0.23) – broadly similar to the prior quarter, with losses slightly narrower. For full-year 2023, revenue is expected to be $2.6bn – $2.625bn, adjusted EBITDA $320m – $330m, and net loss per share $(1.5) – $(1.4). Revenues are therefore forecast to grow ~6% year-on-year, while in terms of net loss, given the write-down mentioned above, and earnings per share reported of $(84.6), there is no realistic comparison to be made.

Why Teladoc Stock Keeps Falling

In mid-July, I posted a note on Teladoc and another “telemedicine” company, Hims & Hers Health, Inc. (HIMS), contrasting the two companies business models and giving Hims & Hers a “buy” recommendation, and Teladoc a “sell” recommendation. In fact, both companies’ share prices have fallen since that note by ~30%.

I plan to tackle Hims and Hers’ disappointing returns in a separate note, although the two companies near identical losses since mid-July serve to illustrate just how much the market has fallen out of love with “telemedicine,” or “virtual care” business model.

It’s not just these two companies either. Babylon Health, a United Kingdom-based virtual care pioneer that was listed on the New York Stock Exchange in 2021, saw shares fall from a high of $272.5 to <$1, before the company delisted amid bankruptcy fears. UpHealth (UPH), which is listed on the Nasdaq via a Special Purpose Acquisition Company (“SPAC”), has a $16m market cap valuation today, down >90% since listing.

Talkspace, a platform designed to connect patients to licensed mental health professionals, has seen shares decline >80% in value since listing. Shares of American Well (AMWL), a provider of online healthcare services, are down >95% during the past five years, and shares of Ontrak, a provider of data analytics based behavioral health management, are down >98% over five years.

It’s easy to be wise after the event, but any way you look at it, telemedicine companies have made for disastrous investments ever since valuations began rising in response to the pandemic-induced global lockdown period, when it was believed patients would turn to telemedicine to access healthcare services, and never look back.

It seems that virtual care services are mostly unloved by both patients and physicians, and Teladoc stock, which traded at $292 per share at the height of the pandemic is now worth >70% less than it was in early 2019, pre-pandemic.

In many ways, it’s hard to fathom why a world that has become dependent on apps, algorithms, video chat and AI has flatly refused to embrace virtual healthcare – doesn’t logic suggest it would be easier for a physician to conduct initial consultations virtually, as opposed to face-to-face, and cutting out travel would surely be more convenient for patients?

In reality, however, it seems physicians dislike being recorded and are unable to perform duties adequately without being able to physically examine patients. Other reasons put forward for the failure of telehealth include a mediocre patient experience, poor technology choices, reluctance to reimburse patients for medicines by health insurers without a face-to-face examination, the lack of a clear long-term strategy, too much emphasis on profits by telehealth proponents, poor performance by telehealth practitioners, and suspicions about how well qualified telehealth consultants may be.

Did Teladoc Have A Bad Q3 – Or Are There Hopes For Long-Term Stability?

On the face of it, for a company whose market cap valuation is presently $2.9bn, a FY23 revenue forecast for ~$2.6bn, which translates to a forward price to sales ratio barely >1x, might suggest Teladoc shares are undervalued. Losses appear to be narrowing also – the net loss per share forecast of $(1.45) at the midpoint of guidance translates to a dollar loss of <$250m.

Unlike many of its failed competitors, Teladoc, which reported a cash position of >$1bn as of Q323, has the financial means to stay the course, and perhaps make the necessary adjustments to its business model that physicians and patients want to see.

Dive a little deeper into Q3 results, however, and there are several reasons to believe that Teladoc may not warrant a $2.6bn valuation, let alone the ~$40bn valuation the company enjoyed at the height of the pandemic.

Teladoc’s business today is divided into two divisions – the first, Integrated Care, is discussed as follows in Teladoc’s 2022 annual report:

A suite of global virtual medical services including general medical, expert medical services, specialty medical, chronic condition management, mental health, and enabling technologies and enterprise telehealth solutions for hospitals and health systems. Services in this segment are distributed primarily on a business-to-business (“B2B”) basis.

The second, BetterHelp, is defined as follows:

Our BetterHelp segment primarily consists of our market-leading direct-to-consumer (“D2C”) mental health platform. The online counseling and therapy services are provided via our network of over 30,000 licensed clinicians leveraging our platform for web, mobile app, phone, and text-based interactions.

Below we can see the performance of each division in recent quarters, up to Q3:

As we can see, neither division is demonstrating much in the way of dynamic growth, although admittedly, the integrated care segment delivered a stronger EBITDA readout last quarter than in previous quarters. Revenues from both divisions, showed relatively flat growth both in the US – climbing from $534m, to $569m, and internationally, growing from $77m, to $91m. Now let’s take a look at membership growth, another key metric.

As we can see, BetterHelp membership is actually falling, and while integrated care membership is growing slightly, revenue per member is falling. Teladoc puts that down to more recently joined members yet to embrace all the services – cross-selling of services is a key strategy for the company – but this strikes me as an unconvincing argument. As I wrote in my July note:

Customers still don’t seem to be accessing Teladoc’s services either – in 2022, revenues from monthly access fees – i.e., subscriptions – represented 87% of all revenues, meaning very few people are finding services on the site they might need and be prepared to pay for. In reality, the majority of access fees are paid by employers on behalf of their employees – most Teladoc “members” may not even be aware that they are members.

In that sense there may be a ticking time bomb here, because when employers realize their employees see no benefit in a Teladoc subscription, they may conclude they no longer need to provide access to the platform.

During the Q3 earnings call with analysts, Teladoc CEO Jason Gorevic was asked whether he still believed previous guidance for “mid-single digit to high single-digit” growth in integrated care revenues, and “low double to mid-teens for BetterHelp” were still valid today. Gorevic declined to provide specific guidance, stating “I think you’ll see us come out in the first quarter of ’24 with an outlook for ’24,” adding “I don’t want to acknowledge or validate those numbers because I don’t recall us giving a longer-term view.”

On an – arguably – more positive note, Gorevic did promise “we expect EBITDA to grow faster than revenue,” meaning profit margins are expected to widen going into 2024.

In summary, after reporting Q3 results, the market opted to dump Teladoc stock once again, with shares dropping from ~$18, to $17, before staging a slight recovery in trading today, to reach ~$17.4. It’s hard to argue that the company’s Q3 earnings enthused the market, or offered much hope that Teladoc could generate long-term revenue growth, or valuation growth.

After A Difficult Q3, Are There Any Reasons For Optimism?

During the Q3 analysts call, Teladoc CEO Gorevic offered the view that “three key themes” should give investors cause for hope that Teladoc’s business is thriving – the fact Q3 results exceeded guidance, the fact that demand for Teladoc’s services amongst “the largest payers and partners globally” remained strong, and the fact Teladoc management planned to undertake “a comprehensive operational review of our business.”

While these “highlights” do not necessarily provide concrete evidence that business performance can improve, the CEO did highlight its “Chronic Care” segment offering as a particular business highlight. The CEO told analysts:

We are increasingly selling access to multiple Chronic Care programs at a single bundled price point. For example, clients purchasing our diabetes plus bundle enable access to multiple Chronic Care programs, diabetes management, hypertension, and weight management.

This has the benefit of removing friction by creating a simpler contracting path opening access to all programs from day one and driving better engagement and outcomes for our clients.

Teladoc has previously flagged the rise of GLP-1 agonists such as Novo Nordisk’s “miracle” type 2 diabetes, and now weight loss drug semaglutide, marketed and sold as Ozempic in the former indication, and Wegovy in the latter, and Eli Lilly’s tirzepatide, which has the same MoA and is approved in T2D as Mounjaro, and is likely to win approval in weight loss very soon, as a potential positive for its platform.

The theory works along the lines that Teladoc could help patients with T2D or obesity make better lifestyle choices, such as eating better or engaging in more healthy activities, via its various telemedicine offerings, helping patients keep track of their vital statistics at the same time, and optimizing their use of GLP-1 agonists. Indeed, it’s not inconceivable that health insurers, reluctant to unnecessarily reimburse for GLP-1 agonists, might insist upon it.

Teladoc has launched provider-based care services for weight management and diabetes prevention designed for this very purpose, stating in a press release that “42% of adults in the United States today are estimated to live with obesity and 1 in 3 American adults have prediabetes.”

GLP-1 agonists are expected to create a >$100bn weight loss market by the end of this decade, so arguably, Teladoc is right to prioritize this form of chronic care, but does Teladoc need GLP-1 agonists more than this drug class needs Teladoc? Like many of Teladoc’s services, the value proposition is vague and unclear. And conversely, if GLP-1 agonists work as they are supposed, could Teladoc’s patient pool end up shrinking, rather than expanding?

Concluding Thoughts – Another Difficult Quarter With Key Questions Left Unanswered

As mentioned previously in this post, the telemedicine revolution has failed to materialize – consider the fact that Teladoc completed a $19bn merger with its chief rival, Livongo, back in 2021, and last year’s impairment charge of >$13bn for evidence of how far the industry has fallen. The one consolation for Teladoc shareholders is that the company has fared better than most of its rivals, even if that is only because it’s larger, and therefore “too big to fail” completely.

Although Q3 results will likely leave investors with more questions than answers – is Better Help in terminal decline? – are users actively engaging with services, or are employers chiefly responsible for revenues? Does the chronic care package have genuine longevity? I would say that the investment case in relation to Teladoc is not without hope. With >$1bn cash, as mentioned, and an operational review planned, management has the opportunity to identify and dispense with failing services and introduce new products that data collected to date suggests give the company a better chance of success.

Teladoc’s ability to generate revenue is arguably impressive, and its shrinking losses offer hope for long-term stability, although when we open up the hood and take a look at the engine, it may be wise to question if another significant downward price correction to revenues, profits, and valuation is the only option for a company that rode the pandemic hype cycle to a valuation of $40bn, but failed to win any admirers amongst its users along the way.

In short, things could worse before they get better at Teladoc, but there are so many compelling use cases for virtual healthcare, and so few publicly traded practitioners left, the chances that Teladoc eventually stumbles across a winning formula cannot be dismissed.