2023-10-03 03:30:17 ET
Summary
- Teladoc's BetterHelp segment saw an improvement in adjusted EBITDA margins in Q2, but revenue growth is expected to decelerate in the second half of the year.
- The stock initially soared on solid earnings results, but has since declined due to fears of competition from Amazon's telemedicine offering.
- The Amazon threat may be overstated, but eventually competition could pressure PMPM fees.
Back in May , I wrote that improved margins at BetterHelp were likely the key for Teladoc Health ( TDOC ) moving forward. At the time, I noted that I did not particularly like the business, but I thought the stock could trend higher if these margins improved. I was "neutral" on the stock overall at the time. The stock is down about -25% since my initial write-up.
Company Profile
As a refresher, TDOC is a telemedicine company that offers primary care, mental health, and chronic condition management. It operates in two segments. The company’s Integrated Health Segment provides general medical, medical secondary opinions, chronic condition, and mental health services. These services are sold to organizations, with TDOC getting per member per month (PMPM) access fees and visit fees for its offerings.
The company's BetterHelp segment, meanwhile, is a direct to consumer business where individuals pay a monthly access fee to be connected the TDOC’s network of therapists via a mobile app, the web, phone, or text.
Last year, about 87% of the company’s revenue was from access fees.
Q2 Results And The Amazon Threat
In my initial write-up, I noted that BetterHelp started to see its margins pressured in 2022 and that in Q1 of 2023 the pressure still had not abated. The company generally acquires new patients through paid search and paid social media, and the advertising costs started to skyrocket early in 2022 as competitors entered the fray, driving up prices. That led to the segment’s adjusted EBITDA margins plunging -568 basis points to 11.2% in 2022, and they were an even worse 6.3% in Q1 of 2023, falling -676 basis points.
For Q2, BetterHelp did see an improvement in adjusted EBITDA margins to 11.7%, up 360 basis points from a year ago. It also grew revenue in the segment by 18% to $292.4 million. Adjusted EBITDA for the segment was $34.2 million, up 71%.
On its Q2 earnings call , CFO Mala Murthy said:
“We are seeing strong gross margin performance overall. We're seeing that across the business both on the Integrated Care side and the BetterHelp side. Specific to BetterHelp, look, over the course of 2022, we talked about improvements in BetterHelp gross margins. We have done a number of things. We've actually taken a number of initiatives to improve therapist productivity, ranging from group sessions, group therapy sessions, to more digital interactions. And all of that is resulting certainly in the trends that we are seeing in our gross margin improvement for BetterHelp. I would say that's really the key driver of the gross margin expansion that we are seeing: overall therapist productivity improvements.”
The company noted that over half of BetterHelp’s ad spend was done in the first half of the year, while in 2022 over half was done in the second half. It noted that this year that ad spending will be pretty consistent over the first three quarters versus a year ago there was a steady ramp though the first nine months of the year.
In conjunction with that, however, TDOC is expecting BetterHelp growth to decelerate in the second half of this year. For the full year, it is looking for double digit to mid teens growth for BetterHelp, while in the first half it produced 20% growth. For Q3 it said it is looking for growth in line with consolidated revenue growth, with implies 6-10% growth for the segment. It is looking for BetterHelp adjusted EBITDA margins to increase between 100-300 basis points for the year.
Outside of BetterHelp, its Integrated Health segment saw revenue rise 5% to $360.1 million, while adjusted EBITDA rose 29% to $38.0 million. The segment’s adjusted EBITDA margin rose 196 basis points to 10.5%. PMPM fees fell - 2 cents to $1.41. It expects the segment to grow revenue by mid- to high single-digits for the full year and to expand adjusted EBITDA margins by 75-125 basis points.
Overall, Q2 consolidated revenue grew 10% to $652.4 million, which topped the $649.2 million consensus. Adjusted EBITDA jumped 55% to $72.2 million. The company had $55.7 million in stock-based comp expenses not included in the adjusted EBITDA number. It generated free cash flow of $64.6 million.
Looking ahead, the company guided for full-year revenue of between $2.6-$2.675 billion, an increase of $25 million at the low end of prior guidance. It is expecting adjusted EBITDA of between $300-325 million. For Q3 it is forecasting revenue to grow between 6-10% to $650-675 million and for adjusted EBITDA of between $72-82 million.
Overall, the quarter was relatively solid from TDOC, marked by nicely improved adjusted EBITDA margins at both its BetterHelp and Integrated Health segments. Growth in the second half for BetterHelp, however, was projected to be a bit lackluster due to lower ad spending. BetterHelp margins also haven’t recovered back to 2021 levels.
While the stock soared nearly 24% the following session on its earnings results, news that the telemedicine offering from Amazon ( AMZN ), called Amazon Clinic, was now available in all 50 states has sent the stock on a downward slide. While AMZN has always been considered a threat, it is catering to the individual market, while TDOC is focused on selling to businesses. Amazon Clinic prices vary by condition and state, but typically seem to cost between ~$30 for messages and over $70 for video visits. The clinics don’t take insurance. AMZN also appears to be trying to filter prescriptions into its online pharmacy through the service.
I’m not sure how big of a threat AMZN is to TDOC’s core business given they are selling to different customer bases, but more competition in general can lead to pressure on PMPM fees. I’ve always felt it would be better for organizations to pay for visits al carte given utilization fees have generally been low.
Valuation
TDOC trades at a 11.8x EV/EBITDA multiple based on the 2023 EBITDA consensus of $309.9 million. Based off of the 2024 EBITDA consensus of $351.6 million, it trades at around 10.4x.
The company is projected to grow revenue nearly 10% this year and 8% next year.
The stock trades at a discount to Doximity, Inc. ( DOCS ), but DOCS is projected to grow faster after this year. DOCS stock has been under a lot of pressure as well.
Conclusion
TDOC shares have been on a huge rollercoaster ride since late July. Solid results sent the stock soaring, only to see the shares coming crashing down on fears of competition from AMZN. I think this competition may be overstated, but I also think the price that TDOC charges could eventually come under pressure. Meanwhile, the BetterHelp business is ripe for scrutiny, and there has been increased competition in this area as well.
From a valuation perspective, the stock looks attractive on the surface, although when factoring in $200 million a year in stock-based comp expenses, the valuation suddenly doesn’t appear that cheap anymore. As such, while the stock has upside potential as it looks to improve margins at BetterHelp, investors currently don’t appear to want to give the company any benefit of the doubt with AMZN looming. As such, I remain “neutral” on the name.
For further details see:
Teladoc Looks Ill As Amazon Threat Looms