America's healthcare system is looking for ways to cut costs, and virtual medical consultations are a promising way to achieve that. Hospital emergency rooms are becoming unnecessarily overcrowded, and routine visits for many common conditions can now often be handled remotely.
Teladoc (TDOC 0.08%) is emerging as a leader in telemedicine, now facilitating nearly 500,000 virtual appointments in the U.S. each quarter and another 160,000 internationally. Teladoc makes money by charging recurring subscription fees to insurers to fully cover their members, as well as per-visit fees for patients.
The company is still reporting net losses, but its rapid growth is driving the business closer to profitability. Let's check in on and diagnose its recent third-quarter results.
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Teladoc results: The raw numbers
| Metric | Q3 2018 | Q3 2017 | YOY Change |
|---|---|---|---|
| Revenue | $111 million | $68.7 million | 62% |
| Operating income | ($15.8 million) | ($21.5 million) | N/A |
| Earnings per share | ($0.34) | ($0.55) | N/A |
Data source: Teladoc. Earnings per share is on a fully diluted basis. YOY = Year over year.
What happened with Teladoc this quarter?
Teladoc's top line saw solid growth, especially internationally.
- The company's 62% revenue growth includes growth from its recent acquisition of Best Doctors. Organically, revenue grew 29% in the third quarter.
- Subscription access fees (subscriptions paid by insurers) grew 60% to $96.6 million. The company is growing very quickly internationally, where subscription access fees were up 187% to $24 million.
- Visit fee revenue (per-visit fees, paid either by insurers or directly by patients) were up 43% to $11.9 million. International visit fee revenue was up 122% to $0.6 million.
Teladoc is also attracting more patients onto its platform.
- Total U.S. paid membership was 22.6 million, up 18% from 19.1 million last year. After taking out the membership gained through its Advance Medical acquisition, membership grew 12% organically. These members are fully covered by insurers, who are paying "per employee per month" (PEPM) fees to Teladoc each month. Teladoc's PEPM for the third quarter was $1.08, up from $0.79 in the third quarter of 2017.
- In addition to the 22.6 million paid members, another 9.4 million individuals have access to Teladoc's providers, but only pay visit fees and aren't fully covered by the insurance subscription plans.
- The total number of visits globally increased 110% to 641,000. There were 166,000 international visits during the quarter, up from nearly zero a year ago.
- Utilization, which is defined as quarterly visits divided by total paid U.S. membership (i.e., those covered by health insurance plans and not including per-fee visits), was 8% (439,000 visits/22.6 million members, then multiplied by four to annualize). This is significantly higher than the 5.6% utilization rate last year.
- Adjusted EBITDA, which removes stock-based compensation and acquisition-related costs, was $6.3 million. This compares to ($0.6 million) in the third quarter last year.
What management had to say
CEO Jason Gorevic once again took a chance to describe Teladoc's longer-term opportunity:
We carry significant momentum into the end of the year as demand for our comprehensive suite of virtual care services is robust across channels and geographies. We have a tremendous growth opportunity in front of us as the entry point into the healthcare system where individuals can go for guided access to a fully integrated, high-quality care experience.
Looking forward
Teladoc shares sold off more than 12% on Monday, Nov. 5, based on COO and CFO Mark Hirschhorn's personal sale of $700,000 worth of stock. But this transaction was also based on a predetermined schedule, which specified nearly five months ago the number of shares and the execution date. In other words, Hirschhorn's sale was not in reaction to the company's third-quarter results.
Management guided for fourth-quarter revenue of $119 million to $121 million, for adjusted EBITDA of $4 million to $6 million, and for a net loss per share of between $0.36 and $0.38.
Gorevic also noted that Medicare's Advantage plans could include telehealth visits as a part of their coverage for the 2020 plan year. As he stated on the conference call, "The proposed requirements are completely consistent with our current commercial health plan offerings, meaning that under these proposed rules, we would be able to offer our full suite of services to all 21 million Medicare Advantage enrollees." This could be an opportunity for Teladoc to significantly increase its U.S. paid membership base.
Investors will watch for additional increases in Teladoc's PEPM rates from insurers, as well as for growth in its international subscription revenue and visits.
