As a reminder, we put out a story yesterday on Teladoc (TDOC). This is the first time we are writing an immediate update after a report because management never replied to our request for comment on yesterday’s story but did address (to some degree) our report on yesterday’s call. This article serves as an addendum to provide management’s side of the story and to also hold the company accountable for its weak call. Teladoc 3Q18 results were uninspiring – management definition organic revenue growth decelerated q/q from 39% to 28%, organic member growth decelerated materially q/q (from 28% to 12%) and both US paid members and 4Q EBITDA appear to have been guided down. Deceleration in organic revenue should be doubly concerning to shareholders given how reliant Teladoc has become on BetterHelp, a controversial business segment that in our view should never fetch anywhere near 10x sales. Operating leverage also remains elusive, with the 4Q EBITDA guide down despite a modest revenue bump. Organic subscription access fee revenue – a figure usually disclosed – was conspicuously missing in the 3Q18 release. In short, we don’t see anything terribly exciting about Teladoc’s 3Q print for the bulls, but do view management’s posturing regarding BetterHelp as a sign that something is wrong with the segment.
Notably, management did not dispute how significant BetterHelp has become to the business – in fact, in his remarks, the CEO Jason Gorevic suggested that he has been clear about BetterHelp’s contribution profile in the past (“ we’ve been very transparent about it being a growth driver and a contributor to our increasing PMPM”). Management also provided no specific details on the unit economics of BetterHelp (i.e. churn, customer acquisition cost etc.), but merely pointed out that BetterHelp metrics have improved over time. Management indicated that tapping into the “influencer” marketing channel is also only a recent development. We therefore wonder whether the purported improvement in unit economics at BetterHelp was in part due to the push into influencers. We also wonder what the backlash in the influencer community means for BetterHelp if that apparently lucrative marketing channel is now under pressure.
Despite downplaying YouTube as a source of leads, management did indicate that social and search are BetterHelp’s “two primary drivers”. We are not quite sure how materially different social is than YouTube given the YouTube scandal has found its way off YouTube and into other social media sites (i.e. Twitter). We also think management should have discussed how much of a contribution general influencer marketing is rather than delineating YouTube from other social. Given management’s claim around social, we also did a quick search of Twitter to figure out what social promotions looked like and found this post:
Source: Twitter
We suggest readers do their own diligence on these Twitter promotions. Clicking this link will do a search on Twitter for posts tagged with @betterhelp. We recommend reviewing each post and coming to your own conclusion around BetterHelp’s social media ad program.
There is one issue from the call that both management and we agree on – BetterHelp is a significant contributor to Teladoc revenue and revenue growth. As a result, if you own this stock, we suggest you start to push management to provide real disclosures around this segment. We think investors are crazy to put a 10x sales multiple on a segment that (from our analysis) loses ~60% of its customers after the first month. We view the 3Q18 call as a major red flag – management did NOT address each point in our report despite our careful and thorough analysis that raised specific issues. In fact, the only piece of the report that management tackled head on with a specific data point was our claim regarding YouTube. We view management’s unwillingness to address each and every point in our report from yesterday as a major source of concern for any Teladoc investor.
We also think its offensive that management got away without discussing Dr. Al Dirschberger. One analyst did ask a question about vetting at BetterHelp, and rather than addressing the elephant in the room, Mr. Gorevic claimed that Teladoc’s vetting is in-line with state requirements.
So we have a thorough vetting process. We look at State Life insurance, we look at the life insure of the providers. We are fully compliant with all the State regs, and we take an approach that we do with all of our business, which is that clinical quality is paramount to the delivery of the care. We take very seriously the membership who comes to us for assistance there. And at the same time, we are always refining and improving our processes around that, which is why we have a clinical quality committee of our Board of Directors. And I mentioned bringing Mark Smith onto the board. I think that’s another good example of us focusing on clinical quality.
This boilerplate statement – that ignored the very obvious Dr. Al elephant in the room – reminded us of Trupanion’s posturing as a result of reporting relating to its rewards program. When the company first faced allegations of non-compliance with regulations, it vigorously denied claims. Weeks later, the company ceased the same program that it had defended only days earlier.
With BetterHelp now representing an undisputed material source of revenue and growth at Teladoc, and with BetterHelp comprised of a direct-to-consumer business model that is very different than Teladoc’s core insurance facing telemedicine business, Teladoc management owes investors specific granularity as to the financial and regulatory condition of BetterHelp. With the recent PR noise regarding BetterHelp’s relationship with influencers and with Dr. Al Dirschberger, we think Teladoc management needs to go above and beyond to give investors comfort with the segment. Instead, we viewed yesterday’s call as a game of hide the ball in which we learned almost nothing new about BetterHelp and got vague and boilerplate answers. This should concern anyone invested in Teladoc. Nothing on the call changed our opinion – in fact, we are only further emboldened.
We reiterate our conclusion from yesterday: that Teladoc is fundamentally ‘uninvestible’ until management actually provides real disclosures around BetterHelp.
Disclosure: I am/we are short TDOC.
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.
Additional disclosure: Additional disclosure: I am/we are short TDOC. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. This article reflects the author’s opinion at the time of publication. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.
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