2023-11-29 19:40:07 ET
Summary
- Teladoc's Q3 results showed improvement in BetterHelp margins and solid revenue growth in its Integrated Health segment.
- The company will undertake a comprehensive operational review to try to kick-start its lagging stock.
- While on the surface, TDOC's valuation looks attractive, high stock comp makes it look less appealing when factoring in this real expense.
Back in May, I wrote that I wasn’t a fan of Teladoc’s ( TDOC ) business and that while the stock appeared cheap on the surface, when adding back stock compensation, the valuation looked stretched. More recently, I said I thought the threat from Amazon ( AMZN ) looked overstated, but that it eventually could pressure its PMPM (per member per month) fees. With the stock down -30% from my original write-up and the company reporting results late last month , let’s catch up on the name.
Company Profile
As a quick reminder, TDOC offers telemedicine services for primary care, mental health, and chronic condition management. Its Integrated Health Segment is sold to organizations whose employees are given access to general medical, medical secondary opinions, chronic condition, and mental health services. Organizations pay TDOC a per member per month (PMPM) access fee for access to its services, and while users pay a visit fee when they use the services.
Through TDOC’s BetterHelp segment, meanwhile, the company offers direct to consumer mental health services. Users pay a monthly access fee to be connected to TDOC’s network of therapists via a mobile app, the web, phone, or text.
Over 85% of the company’s revenue comes from access fees.
Q3 Results
When I first looked at the stock in my initial write-up, TDOC’s biggest issue was that it was seeing its BetterHelp margins pressured as the cost to acquire customers, which it does through paid search and paid social media, had skyrocketed due to a number of new upstarts driving up costs. This had caused the segment’s adjusted EBITDA margins to plunge -568 basis points to 11.2% in 2022, and -676 basis points to 6.3% in Q1 of 2023.
The company saw an improvement begin in Q2, with its BetterHelp adjusted EBITDA margins rising 360 basis points to 11.7%. That recovery continued into Q3, with BetterHelp adjusted gross margins up 487 basis points to 9.1%. However, that was a -260 basis point decline sequentially and below overall 2022 levels.
Overall, BetterHelp saw revenue climb 8% to $285.8 million, with adjusted EBITDA climbing 133% to $26.0 million. Average monthly users rose 5%.
However, the company is expecting BetterHelp to see a big rebound in adjusted EBITDA margins in Q4, with margins of 22-23%. Revenue growth is projected to grow in the low to mid-single-digit range. Much of the reason for the higher margins and slower growth is due to a shift in ad spend more towards the first half of 2023. In Q4 of 2022, BetterHelp revenue climbed 29%, while adjusted EBITDA margins were 19.1% in the seasonally strong quarter.
TDOC’s Integrated Health segment, meanwhile, saw revenue rise 9% to $374.4 million, while adjusted EBITDA climbed 62% to $62.8 million. The segment’s adjusted EBITDA margin rose 543 basis points to 16.8%. PMPM fees rose 1 cent to $1.41 and was flat sequentially. It expects the segment to grow revenue by high single-digits in Q4 and to have adjusted EBITDA margins of between 11.5-12.5%.
Overall, Q3 consolidated revenue grew 8% to $660.2 million, which was basically in line with the consensus. Adjusted EBITDA jumped 73% to $88.8 million. The company had $52.9 million in stock-based comp expenses not included in the adjusted EBITDA number. It generated free cash flow of $68.0 million.
Looking ahead, the company guided for full-year revenue of between $2.6-$2.625 billion, a decrease of $25 million at the high end of prior guidance. It is expecting adjusted EBITDA of between $320-330 million, up from a prior outlook of $300-325 million. It is looking for EPS of -$1.50 to -$1.40 for the year versus a prior outlook of -$1.60 to -$1.25.
For Q4, it is forecasting revenue to grow between 3-7% to $658-683 million and for adjusted EBITDA of between $107-117 million, representing growth of 14-24%. It expects Q4 EPS of -23 to -33 cents versus a -19 cent consensus.
On its Q3 earnings call , CEO Jason Gorevic said:
“We're disappointed with the valuation of the stock today, which we don't believe adequately reflects the value we are driving today and will continue to drive in the future. At the same time, we also know there are significant opportunities to add value through improved business performance. To that end, we recently kicked off a comprehensive operational review of the business. This review includes 2 broad components. First, we have undertaken a portfolio assessment to identify any opportunities to sharpen the focus across our portfolio of products and services and ensure our investments remain highly selective and prioritized in the direction of our integrated whole-person care strategy. Second, we are pursuing a comprehensive review of our cost structure. Following our cost reduction efforts earlier this year, we are confident that we have the right operating structure in place to support the next phase of our growth. Meanwhile, we are actively working to identify opportunities to improve upon this operating efficiency. For example, as a part of that exercise, we have begun standing up centers of excellence that will leverage shared services across the business to enable a more efficient operating structure. We are committed to a thorough review and analysis and we are working with a third party to bring an independent perspective. In short, we are accelerating our efforts to ensure that our business is operating as efficiently as possible, in order to drive profit growth at a level that is meaningfully higher than our revenue growth over the next few years.”
The quarter itself from TDOC was pretty good. Revenue growth was solid, and it saw solid adjusted EBITDA margin growth in both its segments. PMPM fees remained steady, while it grew its Integrated Care members by 10% and Chronic Care by 5%. There were no signs of any deterioration in the business as a result of AMZN or any other competition.
As for guidance, the adjusted margin guidance for its Integrated Health business was a bit soft, although with more visits due to more winter sickness, it is a quarter that typically sees seasonally worse margins. The BetterHelp revenue growth also wasn’t as robust as it could be as it shifted advertising spend. However, Q4 should be one of the segment’s best quarters seasonally due to depression around the holidays, so why it shifted ad spending out of its biggest quarter is a bit questionable.
The operational review of the business by TDOC isn’t a bad thing in my view. The stock has performed poorly this year, and cutting costs and focusing its resources after years of acquisitions isn’t a bad idea.
Valuation
TDOC trades at a 10.5x EV/EBITDA multiple based on the 2023 EBITDA consensus of $324 million. Based off of the 2024 EBITDA consensus of $364.9 million, it trades at around 9.3x.
The company is projected to grow revenue 8.5% this year and 6.6% next year.
The stock trades at a discount to Doximity, Inc. ( DOCS ), which trades at 16.3x FY25 (ending March) EBITDA of $236.8 million. However, DOCS is projected to grow faster (about 10% revenue growth next year), it produces net income profits, and its stock comp is much lower than TDOC ($200 million vs $55 million.)
Based on this, my fair value for TDOC is about 17x. This derived by placing a 15x multiple on 2024 EBITDA minus $145 million in stock comp (to get to a more apple-to-apple with DOCS).
Conclusion
While I don’t think TDOC’s results the past two quarters have been bad, I do think the stock looks close to fairly valued given its large stock comp expense. Cutting back costs, especially with regard to stock comp, could turn me more positive on the name, so it will be interesting to see what it decides to do once its operational review is complete.
I think 2024 could be a better year for the firm as it probably will look to rein in expenses. However, there are also competitive threats that loom and I’ve always felt like its Integrated Health business was ripe to be undercut given its utilization levels. Meanwhile, BetterHelp has long been the company’s growth engine, but that growth has started to slow, as evidenced by its Q4 guidance. As such, I remain neutral on the stock.
For further details see:
Teladoc: High Stock Compensation Is An Issue