Teladoc (TDOC) | Short Francis Lee 2018 Sohn Conference | April 23, 2018
What is Teladoc? Business Overview Key Metrics Price – 4/19/18: $43.05 ▪ Sole publicly traded telehealth provider Average Price Target: $42.73 ▪ Provide patients 24/7 access to doctors via voice telephone (~80%+ of 52-Week Range $22.72 - 44.65 visits) or video to treat non-acute medical needs Market Cap ($,mm) $2,899 ▪ Net Debt: 232 Sells primarily to employer health plan sponsors & managed care TEV: $3,131 companies with contracts that renew yearly Avg. Volume (mm): 1.02 ▪ >4,000 clients & >1,000 physicians & behavioral health professionals Short Interest: 30% ▪ 37mm members (~50/50 split btwn subscription-fee and visit-fee only) Borrow Cost: General Collateral Financials & KPIs How Does Teladoc Make Money? Historical Consensus 1) PMPM + Visit- Fee (“Non -Capitated ”): per-member-per-month fee (PMPM) 2015A 2016A 2017A 2018E 2019E 2020E for access to the network (average of ~$0.60 for base TDOC, ~$1 when Base TDOC Revenue $77 $123 $186 including Best Dr.) & a per visit fee of ~$40 59% 51% % Growth Best Dr. Contribution 47 2) PMPM Only (“Capitated”): pays relatively higher PMPM, but no visit fees Total TDOC Revenue $77 $123 $233 $356 $452 $567 (1) % Growth 59% 89% 26% 27% 25% 3) Visit-Fee Only: does not pay PMPM, but pays a relatively higher visit fee Gross Margin $56 $91 $172 $259 $327 $399 72.8% 74.0% 73.7% 72.9% 72.4% 70.4% % Margin 1.5mm visits Visit Fees EBITDA ($47) ($40) ($15) $9 $37 $73 in 2017 Non- 16% Was 80/20 Capitated – % Margin (61%) (32%) (6%) 3% 8% 13% Split for Base Visit Fee Only 15mm TDOC (excl. – 18mm Unpaid Vists EV / Rev 8.8x 6.9x 5.5x Paid Visits members Best) 45% 55% members (2) (41%) PMPM Fee $0.49 $0.58 $0.62 Subscription (49% ) Fees Total Members 12 18 23 42 84% Total Visits (mm) 0.58 0.95 1.50 2.00 Utilization 3.6% 4.3% 5.0% 3.7% Capitated – 4mm 1 (1) Reflects pro forma full year impact of Best Doctors revenue of an additional $49m members (10% ) (2) PMPM fees excluding Best Doctors; $0.94 when including
Best Doctors Acquisition Acquisition Overview Best Doctors Financials ▪ Founded in 1989, Best Doctors is a specialist network provider 2014 2015 2016 1H17 LHA focused on the second opinion market Revenue $81 $85 $97 $99 ▪ Acquired by TDOC in June 2017 for $446mm ($379 in cash and % Growth 4.0% 14.5% 2.0% $66mm in stock) Gross Profit $51 $49 $62 $67 ▪ Financed portion w/ $275mm in ‘22 convertible notes at 3% & % Margin 63% 58% 64% 68% $175mm in term loan at 8.5% EBITDA ($9) ($13) $8 $12 o Unfortunately in Dec. 2017, did a follow-on and raised $135mm to % Margin (11%) (16%) 8% 13% repay the term loan Paid $22mm in fees / interest to have 6 month bridge loan… o Acquisition Price $446 Revenue Multiple 4.5x Mgmt Rationale Rebuttal EBITDA Multiple 36.0x ▪ Mgmt. assumes that everyone who is diagnosed Doubled TAM with with cancer, MS, IBD, arthritis and surgeries for musculoskeletal will get a 2 nd opinion… additional $28bn Why would a business with $30mm in LTM Best Dr. has an EBITDA losses and cashflow negative for the ▪ Providing telehealth internationally requires international presence foreseeable future decide to pay 36x EBITDA & navigating a whole different set of regulations (15% of revenue) $23mm in interest for an old-line healthcare ▪ Best has existed since 1989 and has only services business growing at MSD with penetrated ~800 clients in that time span $200mm opportunity just significantly lower margins in an adjacency outside by cross-selling products ▪ Operates in a segment outside of Teladoc’s core to existing clients of telemedicine?? telehealth offering w/ little cross-selling capabilities besides both are used remotely 2
How Do Investors View Teladoc? “ “TDOC is by far the early category leader in the rapidly growing and evolving telehealth space with market share of well over 50%” – KeyBanc, May 2017 ” “Teladoc is a first mover, market leader, and the only public pure-play in consumer-focused telemedicine., which we believe will be a meaningful disruptor to traditional healthcare.” – Cannacord, Jan. 2017 “ “We put TDOC’s multiple in into context by comparing it to other disruptive tech players (SQ, WDAY, AMZN, NFLX, GRUB, and PAYX) , which trade at about 7.0x on average” – Citi, Feb. 2018 “Values TDOC at 6.3x 2019E revenue, a slight premium to peer SaaS companies with similar LT revenue ” growth” – Jefferies, Feb. 2018 “We appreciate the shares are expensive , but a comparison of the company’s revenue growth rate and gross “ margin profile to a comparable universe of HCIT and software companies paints a more reasonable picture.“ – Deutsche Bank, December 2017 3
Investment Thesis – Teladoc is Priced to Perfection Thesis What Will That Result In? ▪ Will miss mgmt. / Street numbers due to slower 1 subscription member / revenue growth Due to increasing competition, business model shift from high-visibility subscription revenue to o Projected 10% downside to 2019 revenue utilization dependent visit-fee only ▪ Revenue will become much less predictable as visit fee is very contingent on utilization ▪ Inability to achieve near term gross & EBITDA 2 margin consensus projections Erosion of gross margin due to shift to visit-fee only, a significantly lower margin than PMPM ▪ Need to significantly drive utilization, resulting in likelihood of increased ad / marketing spend Telehealth is an OK business model not worthy of a ▪ Multiple re-rates from SaaS multiple due to 3 SaaS / disruptive tech multiple various catalysts: ▪ Essentially a glorified call-center with 0 patents o Missed guidance due to declining revenue ▪ 4 scale competitors offering largely undifferentiable product quality / predictability ▪ Little to no pricing power and low switching costs o Declining subscription member growth ▪ Potential disintermediation by payers as utilization rises o Additional contract renewals to visit-fee only ▪ Saturated employer end market & irrational acquisition o Low utilization with visit-fee only members strategy as a result 4
PART 1 – BUSINESS MODEL SHIFT Why Do I Believe This is Happening? CEO on Q3 2015 Earnings Call CEO at November 2017 Investor Day “ Having been in business significantly longer than any “For the right opportunities, it [visit-fee only] makes other player in the telehealth market, we have been able good sense for us” to try several different approaches, and the PMPM model is the only one that aligns us with “So we're going to use it [visit-fee only] selectively our clients, provides funds to drive utilization, and produces dramatically better results for our clients .” where it aligns us and our clients, but I don't think you're going to see it in the foreseeable future, it's not going “We believe our [PMPM] model is not only sustainable , represent the majority of our business” but will continue to improve in the future .” 5
Recent Contracts Signed in Q4 ‘17 Have Dramatically Changed the Mix Profile Q4 2017 Member Mix Q1 2018 Member Mix 100% Subscription Paying 51% Subscription 49% Visit-Fee Only Tricare – 9mm (24%) Aetna Fully- Insured – PMPM Members – 4mm members 19mm BCBS (17%) members Federal – (51%) 5mm (14%) Remaining After 3 New Members – 19mm Aetna Fully- members (83%) Contracts Insured – 4mm (11%) Aetna Renewal – 4mm Tricare – 9mm BCBS Federal – 5mm ▪ Mgmt. says revenue impact is neutral for ▪ Tricare contract justified with: ▪ TDOC “won” vs. 10 other companies 2018 BUT that assumes increasing bidding on the deal o Guaranteed minimum visit volume utilization by 50% ▪ Discussion with sell-side analysts said that o Marginally higher visit fee (“couple of o Mgmt. cites ability to access consumer data according to CFO BCBS won’t be a major dollars in excess of $45”) to directly market as primary reason revenue contributor o Further exposure to Optum / United ▪ Cites a “shared savings” plan that will increase “total revenue per visit by 4x” o Hard to believe that Aetna agreed to pay 4x what they previously paid 6
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