Teladoc's (NYSE:TDOC) Q2 Earnings Results: Revenue In Line With Expectations, Stock Soars

Full Report / July 25, 2023

Digital medical services platform Teladoc Health (NYSE:TDOC) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 10.1% year on year to $652.4 million. The company also expects next quarter's revenue to be around $662.5 million, roughly in line with Consensus. Teladoc made a GAAP loss of $65.2 million, improving from its loss of $3.1 billion in the same quarter last year.

Teladoc (TDOC) Q2 FY2023 Highlights:

  • Revenue: $652.4 million vs analyst estimates of $649.2 million (small beat)
  • EPS: -$0.40 vs analyst estimates of -$0.40 (small beat)
  • Revenue guidance for Q3 2023 is $662.5 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year of $2.64 billion at the midpoint
  • Free cash flow of $64.6 million is up from -$32.5 million in the previous quarter
  • Gross Margin (GAAP): 70.8%, up from 69.2% in the same quarter last year
  • US Integrated Care Members: 85.9 million, up 5.3 million year on year

Founded to help people in rural areas get online medical consultations, Teladoc Health (NYSE:TDOC) is a telemedicine platform that facilitates remote doctor’s visits.

The company's key product is their virtual care platform, which allows patients to connect with licensed healthcare providers through a secure online portal or mobile app. Patients can get virtual consultations for a range of medical issues such as mental health, dermatology, and respiratory health.

The customer problem that Teladoc's product solves is access to proper healthcare. Many people, especially those in rural areas, have limited access to doctors or specialists. These individuals may be elderly or in poor health, making it difficult to travel long distances for medical care. Teladoc's platform enables medical consultations from home. Over time, though, a broader population has adopted the platform due to convenience and time saved.

Teladoc generates revenue by charging a fee for each virtual consultation, which varies depending on the type of service provided. A virtual consultation with a primary care physician may cost $75, while a therapy session may cost $150. The healthcare providers who partner with Teladoc are paid by the company for each virtual consultation, and fees also vary by service and specialty. Teladoc also generates revenue by partnering with insurance companies and employers to provide telemedicine services to their members or employees.

Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition.

Competitors offering online legal or document services include Doximity (NYSE:DOCS) and private companies Sesame Health and MDLive.

Sales Growth

Teladoc's revenue growth over the last three years has been incredible, averaging 61.3% annually. This quarter, Teladoc reported mediocre 10.1% year-on-year revenue growth, roughly in line with what analysts were expecting.

Teladoc Total Revenue

Guidance for the next quarter indicates Teladoc is expecting revenue to grow 8.36% year on year to $662.5 million, slowing down from the 17.2% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 7.59% over the next 12 months.

Usage Growth

As an online marketplace, Teladoc generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Over the last two years, Teladoc's users, a key performance metric for the company, grew 7.57% annually to 85.9 million. This is decent growth for a consumer internet company.

Teladoc US Integrated Care Members

In Q2, Teladoc added 5.3 million users, translating into 6.58% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Teladoc because it measures how much the company earns in transaction fees from each user. Furthermore, ARPU gives us unique insights as it's a function of a user's average order size and Teladoc's take rate, or "cut", on each order.Teladoc ARPU

Teladoc's ARPU growth has been decent over the last two years, averaging 7.83%. The company's ability to increase prices while growing its users demonstrates the value of its platform. This quarter, ARPU grew 3.34% year on year to $7.59 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Teladoc's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 70.8% this quarter, up 1.6 percentage points year on year.

For online marketplaces like Teladoc, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, Teladoc had $0.71 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

Teladoc Gross Margin (GAAP)

Over the past year, Teladoc has seen its already strong gross margins rise, averaging 70.2%. These robust unit economics, driven by the company's lucrative business model and strong pricing power, are higher than its peers and allow Teladoc to make more investments in product and marketing.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Teladoc grow from a combination of product virality, paid advertisement, and incentives.

It's relatively expensive for Teladoc to acquire new users as the company has spent 47.8% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates that Teladoc has to compete for its users and continue investing to maintain its growth trajectory.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

This quarter, Teladoc's EBITDA came in at $72.2 million, resulting in a 11.1% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 10.6%.

Teladoc Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Teladoc's free cash flow came in at $64.6 million in Q2, down 28.2% year on year.

Teladoc Free Cash Flow

Teladoc has generated $103 million in free cash flow over the last 12 months, or 4.06% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Teladoc's Q2 Results

Sporting a market capitalization of $3.82 billion, Teladoc is among smaller companies, but its more than $958.7 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

Teladoc beat slightly on revenue and more convincingly for adjusted EBITDA. Another major positive was that the company raised full year guidance for revenue, adjusted EBITDA, and EPS. On the other hand, its decelerating revenue growth wasn't great and next quarter's revenue guidance came in slightly below Wall Street's expectations. Overall, the results were mixed but the full year guidance raise was an important positive. The stock is up 7.59% after reporting and currently trades at $24.51 per share.

Is Now The Time?

When considering Teladoc, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Teladoc is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last three years. On top of that, its gross margins are a strong starting point for the overall profitability of the business, and its ARPU is growing.

At the moment Teladoc trades at next twelve months EV/EBITDA 11.7x. There are definitely things to like about Teladoc and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $29.9 per share right before these results, implying that they saw upside in buying Teladoc even in the short term.

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