What Teladoc and Livongo Health's Explosive Results Mean For Success Post-Merger

Just before the close of their high-profile merger, Teladoc Health (TDOC -1.97%) and Livongo Health each reported blockbuster results for their respective third quarters. This marked the third consecutive quarter of accelerating revenue growth for each company. Teladoc and Livongo also share a strategy of investing heavily in the future and foregoing current profits to drive future growth.

In this episode of Fool Live that aired on Oct. 28, "The Wrap" host Jason Hall, Fool analyst Jim Gillies, and Fool.com contributor Danny Vena discuss the results, the merger, and what it all means for investors.

Jason Hall: So, our good friend, Danny here -- Danny Vena -- I know you popped away for a little bit to take a closer look at a big high-interest company, Teladoc, reported drop after hours. Are you ready to talk about Teladoc? Or you need a few more minutes to marinate and the juices of their earnings announcement?

Danny Vena: Actually what I'm going to do is I'm going to talk about it a little bit, and also I'm going to go ahead and share my screen, so folks can see the earnings announcement as I go along. I'm just going to pick out a couple of headline numbers and give them some context. But the news is pretty good for Teladoc shareholders. You wouldn't know that by the way the stock is reacting after hours.

Jason Hall: Teladoc, that's ticker, TDOC. Just for everybody's edification that might not know, this is a company that's just really leading the charge in telemedicine. Big merger, big acquisition they made not too long ago, that's increasing their addressable market. Huge interest, hyper-growth company, and ton of people have made a ton of money and something's happened.

Danny Vena: What has happened is that the earnings release is out. Let me go ahead and get my screen shared here. Let me know if I need to beef that up a little bit. Teladoc reported revenue that grew 109% year over year, more than double from this time last year to $289 million. The total visits from people who saw doctors via their telehealth platform, basically -- using the app to conduct a doctor-patient visit -- The number of visits increased 206%. So that's three times what they were a year ago to 2.8 million year-over-year. For the first nine months of this year, we're talking 80% growth and total visits up 163%.

Now to give that context, I went back and looked at the first two quarters of this year just to see what they had reported previously. In the first-quarter, revenue was up 41%. In the second quarter, revenue was up 85%, and now we're in the third quarter and revenue is up 109%. So three successive quarters of quarter-over-quarter acceleration. So yeah. A lot of this has to do with COVID-19 and the fact that patients are less willing to make the trek out to their doctors office and go hang around sick people for fear of contracting the coronavirus or whatever else is out there for that matter. People are adopting telemedicine in unprecedented numbers. I hate to use that word because we've used it's so often over the last six months, but it really is unprecedented.

Just scroll down a little bit here. You can look at the numbers here in the middle column. That's year-over-year growth for the quarter. US access fee is up 111%. International only up about 18%. Their international growth has only just started. So total 90%. Then visit fee revenue. This is for people who are not part of a subscription, who just make a one-time payment in order to use the platform. US paid visits up 148%. U.S. visit fee is only 269%, total up 171%. Triple-digits pretty much across the board. Now, I'm going to cheat here just a little bit. Teladoc health let investors know just a couple of months ago that it was going to buy Livongo Health. For those that are not familiar with Livongo, Livongo Health is a company that uses AI and connected devices to allow users to get little hints, tips, tricks, ways to stay on track managing their chronic health condition. Something like diabetes.

Jim Gillies: Yeah. Specifically diabetes.

Danny Vena: Yeah. Diabetes is the one they started with, and that is still their biggest seller. They have since expanded into things like depression, anxiety, weight management, a couple of other areas. Livongo Health also reported their numbers after the close of the market. Look at this, third-quarter total revenue of $106 million up 126% year over year.

Again, I am a big believer and I bought both of these stocks a long while ago. It was a speculative position because they were so small. But in such a growth area, you only need a small position. If you look at what Jim was just talking about, the Livongo for diabetes members, 442,000 enrolled, up 113% year-over-year. Revenue's up 126%. Still losing money. They got a GAAP net loss of $25 million and a loss per share of $0.26 cents per share. That's because they are investing heavily right now because they've concluded that the lifetime value of these new customers is worth more than what they're spending to get them.

Jason Hall: I think another big part of that too, Danny, that's worth mentioning, this is going to be a competitive space. There's a lot of big companies. Microsoft is making a play here. A lot of companies are putting money here, and the best money that's going to be spent is the money they get spent soonest, to build out capacity, to establish relationships with providers, with payers, large employers. The sooner they do that, the more control of the market they're going to have, and the more they're going to control the future. I think that's a really, really important thing.

Danny Vena: You're absolutely right, Jason. One of the things to think about is they're establishing relationships now with doctors offices, with large medical clinics, with medical systems really, networks of hospitals. For every one of them that they bring in and have a good relationship with, they're going to control that much more of their potential addressable market going forward. I think at this stage of their growth, I wouldn't expect to see them with any profits in the foreseeable future. Every once in a while, they'll have a surprise profit might pop up. But these are high growth companies. Like I said earlier, high-risk, high-reward. So if you do buy positions in these companies, ensure that it is sized appropriately. That said, I'm very pleased about the numbers in both of those reports.

Jason Hall: Yeah. I want to add a little context here too. I think it's important

Danny Vena: Sure.

Jason Hall: There's one thing to be showing a loss on a GAAP basis, generally accepted accounting practices or generally accepted accounting principles.

Jim Gillies: Principles.

Jason Hall: It's one thing to have that. Because here's the thing, this is a company that has tons of money in there. So their depreciation expenses are getting bigger and bigger because they're reinvesting a lot of that capital. But if you look at it on a cash-flow basis, over the past 12 months, Teladoc generated $61 million. This doesn't include the report that just came in. So I expect this number might go up, but they generated $61 million in operating cash flow over the past year and $46 million in free cash flow. A really important thing. Don't get hung up on, "Well, they're not profitable." They're generating free cash. They are generating operating cash that's covering their costs. They're eating their own cooking. This is their strength here that's easy to miss because of the business model and where they are in their [growth] stage.

Jim Gillies: Livongo is still burning money, but that's going to be folded into Teladoc in short order. The unfortunate part is that because of the way that they account, I think the merger agreement is every share of Livongo that Danny owns, he is going to get 0.592 additional shares of Teladoc, plus I think $11.30 something in cash.

Danny Vena: Right.

Jim Gillies: But because of the complexity of the terms, if anything, Livongo, this is a very, very high level far away analysis. But just looking briefly at both of these, Livongo had an even better quarter, 126% top-line growth is better than 109%. But Livongo is inextricably tied to Teladoc share price now. You're not going to get a boost just because Livongo did better. If Livongo in a vacuum would've been up, say today, but if Teladoc is down after hours, if Teladoc falls tomorrow in response to, "You gave us 109%. We were hoping for 120%." It's going to take Livongo with it. Just be aware of that, Fools.

Jason Hall: Exactly. I think the merger was announced August 20th, somewhere right around there.

Jim Gillies: Yeah, it's a nice thing to wake up to.

Jason Hall: Yeah. The stocks have moved generally in lockstep since then. I think Teladoc is down about 4%, and Livongo is down about 2%. That's going to be the case.

Jim Gillies: Whatever the math works out to, 0.592 times TDOC plus, I think, $11.33 or whatever. They're going to be pretty much lockstep from there.