Teladoc shares jump as Q3 losses narrow, revenue exceeds expectations amid turbulent year

After a rough ride in the first half of 2022, Teladoc had some good news to report this week as it slightly exceeded revenue expectations in the third quarter and saw robust growth in its direct-to-consumer business.

Revenue during the most recent quarter rose 17% to $611 million from $522 million a year ago, slightly surpassing analysts' expectations of $609 million.

The biggest driver of that growth was BetterHelp, Teladoc's direct-to-consumer mental health brand. BetterHelp revenue rose 35% as compared to a year ago, Teladoc's chief financial officer Mala Murthy said during the company's third-quarter earnings call.

U.S. paid memberships in the quarter rose nearly 10% to 57.8 million, above Teladoc's own expectations of between 55.5 million and 56.5 million members.

In addition to revenue growth, Teladoc also reported significant cost savings.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) during the third quarter came to $51.2 million, compared to $67.4 million in the prior year's quarter but still above the high end of the company's guidance range.

"The third-quarter adjusted EBITDA outperformance relative to our expectations was driven primarily by stronger cost control as we look to drive efficiency. Both technology and development expense and gross margin contributed to the upside," Murthy said.

The company reported continued improvements in its gross margin led by growth in its BetterHelp brand.

"We're leaning more into digital interactions with consumers as well as virtual group therapy sessions, which is a more efficient way of interacting with the consumer and improves the gross margins. It actually has the other effect of actually depressing our visit volume. So we actually see fewer visits. Fewer visits in the BetterHelp business is actually good, because it improves our gross margin and enables us to serve more people with fewer professional resources," Teladoc CEO Jason Gorevic said during the earnings call.

BetterHelp remains on track to deliver "strong revenue and margin contribution," Gorevic said. "I think you should also just expect us to continue to take a more balanced approach to growth and margin in BetterHelp," he told analysts. "That business has grown and scaled incredibly fast. It's at a run rate of $1 billion. And I think it's fair to expect us to focus on driving both growth and efficiency."

Analysts have raised concerns over the impact on Teladoc's direct-to-consumer segment as inflation-hit consumers cut spending.

Teladoc shares have fallen more than 70% so far this year after losing over half their value last year.

But investors seem pleased with Teladoc's third-quarter results, as the company's shares jumped 10% in premarket trading Thursday.

"Teladoc isn’t out of the woods yet," said Citigroup analyst Daniel Grosslight, Nasdaq reported. But the solid results and the better-than-feared forecast cut show that "a clear path forward is beginning to emerge," Grosslight said in a client note.

Enrollment in the company's chronic care management program increased 9%, or by 66,000 members, to reach 791,000 members at the end of the third quarter. Murthy projected high single-digit revenue growth for the company's chronic care business through the end of 2022 and into 2023.  

George Congdon, senior analyst at Third Bridge, also sees a potential turnaround to the business after a tumultuous first half of the year.

"Teladoc's Q3 2022 revenue came in slightly ahead of expectations. These positive results were likely driven by increased penetration in the enterprise demographic for the company's Livongo offering, and better-than-expected cost rationalization on the integration effort," Congdon said. "Though this was just one quarter, our experts believe Teladoc seems to be hitting its stride on its path to profitability and turning around the business." 

However, Teladoc is still saddled with sizable losses. 

In the first quarter, Teladoc took a $6.6 billion hit to write down the value of its Livongo acquisition and it took another $3 billion impairment charge in the second quarter. With those two impairment charges, the company's losses have ballooned to $9.8 billion in the first nine months of the year. There were no new impairment charges in the third quarter.

Companies opt for impairment when the value of assets or goodwill on their books is no longer fully recoverable. 

Teladoc shelled out $18.5 billion for the digital chronic condition management company, a record in digital health. When Teladoc acquired Livongo, it touted the deal as key to its strategy to create one app for primary care, chronic care and other virtual care services.

The company also was hit with an investor lawsuit alleging Teladoc misled investors about the company’s business, operations and prospects as the virtual care company's stock price has plunged in the past year.

Teladoc narrowed its losses during the third quarter. The company reported a net loss of $73.5 million, or 45 cents a share, compared with a loss of $84.3 million, or 53 cents a share, a year ago. Analysts tracked by FactSet were anticipating a 57-cent loss per share on the basis of generally accepted accounting principles.

Executives were largely positive about the company's third-quarter results during the earnings call. 

Gorevic flagged continued momentum in its Primary360 product business as a particular bright spot.

"One in every three of our Primary360 members is using two or more of our services, demonstrating Primary360's role not just as virtual primary care, but also as a front door to multispecialty care," he said during the earnings call. "So, while we're at the beginning stages of bringing integrated virtual primary care to the market, the strong member and client response to the service gives us a lot of confidence in the long-term opportunity."

The company is seeing momentum with large health plans signing on with Teladoc's Primary360 service and its virtual chronic care management services, he said.

These capabilities also enable Teladoc to tap into the growing interest in value-based care arrangements among health plans, large employers and health systems, Gorevic noted.

"Value-based arrangements are becoming even more important in the current macroeconomic environment. And as I look at the chronic care pipeline, we're seeing a notable increase in deals with such features. We view this trend as very favorable for us since our proven outcomes present a tremendous value proposition for our clients, and we're well-positioned in the market to capitalize on that dynamic," he said.

He touted a chronic care shared savings pilot in partnership with a large Blue Cross Blue Shield plan that resulted in Teladoc exceeding its medical cost savings target by 60%. "Not only do we drive better outcomes for our members and drive more savings for our clients, but we were able to realize a small, shared savings bonus," he said.

Teladoc faces growing competition from other telehealth players as well as retailers like CVS and Amazon, which plans to acquire primary care provider One Medical for nearly $4 billion.

Gorevic noted that the tightening economic environment would have a bigger impacts on smaller virtual care companies.

"I was with a very large client yesterday, and the challenge of them, quite frankly, questioning whether some of those smaller companies are going to be able to survive is definitely top of mind for them," he told analysts during the call. "I'm not sure that I would say that we've seen a massive shakeout yet, but I'm hearing quite a bit among both clients as well as other healthcare companies that is very much attuned to that."

The company is projecting full-year 2022 revenue to be in the range of $2.39 billion to $2.41 billion and adjusted EBITDA in the range of $240 million to $250 million. Teladoc expects total U.S. paid membership of 57 million to 58 million members, an increase of 1.5 million members over its prior guidance.

The company also projects total virtual visits for the year to be between 18.4 million and 18.6 million visits, representing growth of 19% to 21% over the prior year.