As Teladoc shares tumbled after dismal Q1 earnings, analysts question telehealth giant's growth strategy

Shares of Teladoc plunged more than 45% Thursday after the telehealth giant reported disappointing first-quarter results.

The company reported earnings in the first quarter that missed on both the top and bottom lines. Teladoc's revenues grew 25% year over year to $565.4 million, below the $568.9 million that analysts were expecting. Earnings per share came in at a loss of $41.58, well below the loss of 62 cents expected, largely due to a write-down of assets related to its acquisition of Livongo in 2020. The company's sizable net loss included a noncash goodwill impairment charge of $6.6 billion, or a loss of $41.11 per share.

The company also warned of a weak sales outlook and lowered its 2022 revenue guidance from a midpoint of $2.6 billion to $2.45 billion citing higher advertising costs in direct-to-consumer mental health markets and a longer sales cycle in the chronic condition market, Teladoc CEO Jason Gorevic told analysts during an earnings call Wednesday.

"I think the market is in transition. It's in a period of transition now from historic point solutions to the future which is really whole-person virtual care. And that's where I think the strength of our chronic care portfolio, combined with our virtual care solutions, really makes for an unmatched combination," Gorevic told Fierce Healthcare. "We're very focused on the integration of all of our capabilities into a seamless, integrated, whole-person, virtual care product portfolio. And right now, we're seeing the market kind of in that transition phase." 

Increased competition in the telehealth market means competitors are spending heavily on marketing to attract customers, Gorevic said.

"One example of this is paid search advertising, where we've seen a notable increase in rates for keywords associated with online therapy. We believe the biggest driver of this dynamic is smaller private competitors pursuing what we think are low or no-return customer acquisition strategies in an attempt to establish market share. Some of those same providers are also exploiting the temporary suspension of certain regulations associated with the national health emergency concerning the prescription of controlled substances," he said.

This dynamic is likely to persist at least through the remainder of this year, he said, resulting in lower growth and margin contribution from BetterHelp, the company's direct-to-consumer mental health platform.

"The good news," he said, "is that unlike smaller market participants, we operate at a scale that allows us to continue investing in the direct-to-consumer market to drive both strong growth and returns, and we can drive growth while remaining disciplined in our member acquisition strategy."

However, Teladoc's first-quarter results will "raise significant questions about the long-term growth algorithm, and management’s visibility to forecast the business," wrote Jefferies analysts in a research note.

Wall Street also responded to the company's dismal first-quarter performance. Teladoc’s stock is down more than 67% this year—and 90% from its peak price in February 2021. At least fifteen analysts slashed their price targets on Teladoc Wednesday and Thursday following the earnings report, according to data from Refinitiv. 

One of those analysts, SVB Leerink's Stephanie Davis, wrote in a research note that the current competitive backdrop dampens Teladoc's growth engine. "The company is left with a direct-to-consumer air pocket that business-to-business sales (and their inherently longer cycles) are too slow to fill. This puts Teladoc squarely into a FY23 growth accelerationstory, creating an attractive setup for the end of the year but a less compelling play in the near term."

Teladoc's plunge also could have a "flow-through impact on the entire digital healthcare sector" and could weigh down other companies in the space including telehealth competitor Amwell, online therapy provider Talkspace and companies with telehealth exposure like One Medical, Doximity and GoodRx, she wrote.

Analysts at Citi warned that the results “reveal cracks in [Teladoc's] whole health foundation, as increased competitive intensity is weighing on growth and margins” and that they “are doubtful that we will see the competition-driven headwinds abate anytime soon.”

Competition in virtual care intensifies

As the virtual care market has gotten more crowded, many employers are inundated with small, point-solutions vendors, and that's created "noise in the marketplace," Gorevic said. "While in the near term we expect this noise to persist, we believe our broad integrated approach to virtual and digital care delivery is a competitive advantage that positions Teladoc to be the long-term winner in the space," he noted.

Teladoc doesn't plan to enter into an ad spending war with competitors, he told analysts. "We continue to take a disciplined approach to that. So we are not going to overspend our way through that and follow the lead of irrational competition," he said.

Within the employer market, Gorevic conceded that HR departments are "getting squeezed because there's so much going on with respect to return to office, dealing with the Great Resignation and all of the hiring and allocating resources to talent acquisition and retention." As a result, more employers may buy digital health solutions through their health plans, he noted.

The virtual mental health market has been dynamic from a funding perspective, with more than $5 billion raised across the private sector last year and several companies valued at more than $3 billion, including Cerebral and Lyra. 

But Gorevic is bullish on growth for its DTC mental health platform BetterHelp, projecting 30% to 40% long-term revenue growth for the mental health business.

Executives also touted the rollout of Teladoc's Primary360 virtual primary care service. 

"We're getting a lot of great reception, and I think the evidence of that is the traction we're getting with our Primary 360 products or virtual primary care. We're seeing tremendous interest among very large health plans and employers for that product, which of course is bolstered by our suite of chronic care solutions," Gorevic told Fierce Healthcare.

On the flip side, Teladoc's merger with Livongo has struggled. It 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.

More than 110 Livongo employees have left since the deal closed, with only a few of Livongo's senior leadership sticking around for the long haul, Insider reported last fall. Employees also told Insider there's been confusion in the sales process as Teladoc grapples with an increasingly competitive market, and its clients such as health plans stand up their own virtual care tools, Insider reported.

The company warned investors it was likely to record a large charge in the quarter in a 10-K filed with the U.S. Securities and Exchange Commission in late February.

But one analyst is slightly more optimistic about Teladoc's future. Berenberg analyst Dev Weerasuriya noted in a report that Teladoc still grew sales 25% in the quarter and is likely to grow its revenues at least 15% annually from here on out and should be able to earn as much as a 15% operating profit margins on these revenues, Yahoo News reported.