A Yearly Checkup for Teladoc Stock – TDOC
Because the pandemic has become political, you’re sticking your neck out when you say stuff like this, but here it goes. What if the mortality rate was really serious, like in the double digits? Would people behave differently? Perhaps, but a low mortality rate that increases with age isn’t a big concern for many of the world’s countries. Fail a PCR test in Russia and they just might let you on the plane anyway. In Yemen, they use antigen tests and call them PCR tests. In one African country, the hotel manager said, “do you need the actual PCR test, or just the result?” Paying for test results is also possible in Mexico, a country that never put any travel restrictions in place.
The pandemic showed us that nations can’t collectively agree to a course of action when faced with a global crisis. On the positive side, the pandemic accelerated certain life sciences trends like telehealth leading us to wonder if these changes are temporary for companies like Teladoc (TDOC), a leader in the telemedicine space, but hardly one without any competition. It’s something we highlighted in last year’s piece on 9 Telehealth Companies Bubbling to the Top, five of which are now publicly traded stocks.
Five Telehealth Stocks
Let’s start by looking at how all the publicly traded telemedicine stocks compare on several dimensions that help indicate leadership position – size and revenues:
|Simple Valuation Ratio||1-Year Return|
We generally consider revenues to be a good indicator of leadership as they are a proxy for market share captured. The above table shows Teladoc leading the pack in terms of size and revenues. As for relative valuation, we wouldn’t consider TDOC to be overvalued when compared to its peers based on our simple valuation ratio. With twice as much revenue as their nearest competitor, our next concern would be how the pandemic dissipation has affected revenues. As you all know, one side effect of the war in Eastern Europe is that the coronavirus went dormant and is now largely ignored in many countries around the world. While a lessening focus on the pandemic has affected Teladoc’s stock price, it hasn’t affected their revenue growth one bit.
The quarterly revenue/earnings chart on the right appears to be the perfect picture of financial discipline which shows Teladoc steadily moving towards profitability alongside steady revenue growth. (If you’re unfamiliar with what the company does, check out our piece on Teladoc, The Only Telehealth Stock for Telemedicine Investors). Based on the simple financial metrics above, we could conclude that all is well, but a bit of digging shows some areas of concern. Let’s start with something Teladoc management wants to sweep under the rug – the $14 billion acquisition of Livongo which resulted in a combined entity that’s now worth less than $10 billion.
Teladoc’s Livongo Acquisition
While Teladoc management squanders precious resources focusing on divisive D&I initiatives like the “Courageous Conversations Series” they launched in 2020, we’re left wondering why the company isn’t having courageous conversations with investors about what happened with that Livongo acquisition? We’ve been critical of the cannabis industry for its liberal use of goodwill, but that pales in comparison to what Teladoc managed to achieve. Of the $13.9 billion consideration that Teladoc ponied up to acquire Livongo, $12.8 billion or 92% of that was goodwill. Bear in mind that Teladoc’s market cap today is less than the goodwill they ascribed to the Livongo acquisition which may result in some difficult-to-understand adjustments to their financials if the share price keeps sinking.
The Livongo acquisition was meant to shore up Teladoc’s chronic care offering, particularly around diabetes. In recent quarters, chronic care enrollment growth appears to be tailing off, something management doesn’t seem to address with the Q4-2021 earnings call mentioning the word Livongo just twice.
Let’s hope the above decline in chronic care enrollment growth represents a seasonal stall.
So, did Teladoc squander $14 billion worth of shareholder value by paying too much for a company that didn’t add the value they were expecting? We’re told 2021 revenues represented an “incremental $500 million from acquired businesses,” and we’re also provided the below table which shows what 2020 revenues would have looked like if Livongo was acquired at the beginning of 2020.
Back of the napkin math tells us that the acquisitions of Livongo (acquired for nearly $14 billion) and InTouch (acquired for around $1 billion) brought in $348 million in incremental revenues for 2020 moving to $500 million in 2021, a growth rate of about 44%.
(Update 4/22/2022: That’s assuming no revenues were recorded in 2020 for these acquisitions which is probably not the case. Livongo closed on October 30, 2020 and InTouch July 1, 2020.)
Not bad, but also consider the proforma impact on losses for 2020 ($306 million) and the $500 million in debt Teladoc inherited as a result. What seems to be missing are any signs of cost synergies.
Teladoc Isn’t Cutting Costs
We need to be careful about investing in companies that show strong revenue growth which results from spending $1.50 on marketing to acquire $1.00 in sales. While we may be led to believe that earnings are coming under control based on cost-cutting measures, that’s hardly the case. Teladoc’s Chief Financial Officer has managed to move the earnings trend in the right direction using window dressing as opposed to decreasing overhead costs. And there are no signs that cost-cutting is in the cards. While 2021 revenues may have increased 84% over the prior year, their advertising and marketing expenditures increased by the same percentage. They’re now spending more on sales/advertising/marketing ($667 million) than they are on cost-of-goods-sold ($650 million). Says the company:
Sales expenses were $250.6 million for the year ended December 31, 2021, compared to $154.1 million for the year ended December 31, 2020, an increase of $96.5 million, or 63%. This increase substantially reflects the impact from acquisitions.Credit: Teladoc 10-K
That last sentence is important because this is where synergies can now be realized. Have some BSD go in there and axe the bottom 25% of salespeople which will minimally impact revenues while reducing sales costs by 25%. Synergies work when you can decrease costs due to redundant functions, but this may not be in the cards. Says the company:
Advertising and marketing expenses were $416.7 million for the year ended December 31, 2021, compared to $226.2 million for the year ended December 31, 2020, an increase of $190.5 million, or 84%. This increase was primarily driven by higher digital and media advertising in support of D2C mental health specialties, as well as higher engagement member marketing. In addition, the increase included the impact of acquisitions, and an increase in personnel costs due to increased hiring.Credit: Teladoc 10-K
Read that last sentence. Advertising/marketing spend increased because of the acquisition while they simultaneously increased costs by hiring more bodies. Other parts of the 10-K talk about how critically important it is for the company to expand their sales and marketing team or the whole thing goes pear-shaped. There’s a concern here that Teladoc is spending $1 to make a $1, and the obvious question is this: What happens when they implement a cost savings initiative because easy capital has dried up and they don’t want to increase the $1.2 billion in debt on their books?
The Telemedicine Thesis
Let’s get down to brass tacks. Our original investment thesis surrounds the appeal of digital medicine, something we wrote about in our piece on Telehealth is More Than Just Virtual Doctor Visits. The good news is that Teladoc enjoyed a surge in popularity due to the pandemic that doesn’t appear to have been temporary. The bad news is that the Livongo acquisition doesn’t appear to have enjoyed the success everyone was expecting, particularly when it comes to cost synergies being realized. We also find the investor relations efforts lacking when the company does a poor job of simplifying what metrics investors ought to be paying attention to and why. In fact, they seem to be more focused on vanity metrics than what really matters. For example, look at the below charts taken from the Q4-2021 earnings deck.
Why is the top chart – growth of visits – so prominently displayed when “visits” account for just 13% of revenues in 2021? What matters more is “platform-enabled sessions,” a metric that represents 85% of 2021 revenues and appears to be in a decline which is concerning. Clients pay Teladoc a fee to offer their program to end customers and save money by doing so. If the end customer isn’t using the platform then it defeats the purpose. Says the company:
We believe platform-enabled sessions are an indicator of the value our Clients derive from the platform they license from us in order to facilitate virtual healthcare.Credit: Teladoc
We also see a “total visits” metric thrown around when adding these two numbers together – visits and platform-enabled sessions – makes little sense when their respective contributions to total revenues are so skewed. This left us wondering which are most important metrics to use for measuring the health of Teladoc’s business.
Teladoc Metrics to Watch
This is a convoluted business with lots of moving parts. Should TDOC shares continue to fall, the company may have to start recording impairment charges (something we discussed in our recent article on Cresco Labs). That will make profitability even more difficult to monitor, so we need to pay attention to the simple stuff – how much runway they’re getting with that $896 million in cash they have remaining, and how much they’re able to grow revenues in the coming year. In looking at guidance, we see revenue growth of at least 25% coinciding with an expectation that member count won’t be growing much at all.
If the hundreds of millions in ad spending isn’t attracting new customers, then maybe it’s making existing customers use the platform more? Even without new customer growth, total visits are expected to grow at least 20%, which means “revenue per member” becomes an important metric to watch. Or does it? We can’t say without knowing how they’re licensing the platform to their various client types – usage-based fees? fixed contracts? depends? – so it’s back to watching for revenue growth. After spending an entire day poring through their year-end collateral, we’re left with more questions than answers.
As investors in Teladoc, here’s how we feel about the whole thing. The company had their chance to spend a great deal of money on acquisitive growth and they blew it like a drunken sailor. Whether the Livongo deal ultimately benefits shareholders may be uncertain, but we can be sure of one thing. They need to take all the resources at their disposal and use them to effectively grow the business without diluting shareholders or going further into debt. Want to grow your sales team? Make some cuts in G&A. Pull a Jack Welsh and can the bottom performing 10% of staff across all overhead functions starting with all the HR staff wasting everyone’s time organizing “business resource groups.” Have some courageous conversations internally about how to aggressively grow the business while keeping costs stable. Make that $896 million in cash on the books last until profitability has been achieved because investors aren’t going to offer up more capital given so much was pissed away on the last acquisition spree.
Teladoc today hardly represents what we expected to see following the Livongo merger. The company provides far too many metrics and expects investors to arrive at their own conclusions instead of focusing on key metrics and telling us why they’re relevant. We only hope that their master plan to acquire Livongo involves some strategy we’re just not capable of seeing outside the ivory tower. While Teladoc may be the leader in the telemedicine space, they appear to be subsidizing a lot of that growth with excessive spending and we believe that needs to be curtailed.
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