Teladoc Health Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 13 speakers on the call.

Operator

Afternoon. Thank you for attending the Teladoc Health Third Quarter Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for for now. Patrick, please go ahead.

Speaker 1

Thank you and good afternoon. Today after the market closed, we issued a press release announcing our Q3 2023 financial results. This press release and the accompanying slide presentation are available in the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Jason Gorevic, from our Chief Executive Officer and Mala Murthy, Chief Financial Officer. During this call, we will also discuss our Q4 and full year 2023 outlook, and our prepared remarks will be followed by a question and answer session.

Speaker 1

Please note that we'll be discussing certain non GAAP financial measures that we believe are important in evaluating Teladoc Health's performance. Details on the relationship between these non GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied in this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our website.

Speaker 1

I would now like to turn the call over to Jason.

Speaker 2

Thank you, Patrick, and thanks, everyone, for joining us. This afternoon, we're pleased to report a strong Q3 with results that met or exceeded our key financial and operating guidance. Our performance reflects the fundamental strength of our business and our continued success in making better health available to our more than 90,000,000 members. In my prepared comments this afternoon, I want to focus on 3 key themes that reflect the value that we're delivering today and poised to deliver in the years ahead. First, Our Q3 results met or exceeded our key financial and operating guidance, strengthening a solid balance sheet that distinguishes us across our industry.

Speaker 2

2nd, the demand for our products and services remains strong with the largest payers and partners globally viewing Teladoc Health's whole person care as the prescription for point solution fatigue and a disconnected healthcare system. And third, we are taking additional concrete steps to further accelerate our business for not only on bottom line performance. This includes a comprehensive operational review of our business. I'll talk more about what that means in a moment. Let's begin with Q3 results.

Speaker 2

On the top line, our consolidated revenue grew 8% on a year over year basis in the 3rd quarter to $660,000,000 And as a result of our continued efforts to drive margin improvements this year, Our consolidated adjusted EBITDA of $89,000,000 exceeded the high end of our expectations. We were pleased to see revenue from our Integrated Care segment grow 9% year over year to $374,000,000 for now. Compared to the Q2, revenue grew 4% sequentially, driven in large part by higher enrollment in our chronic care programs, for now. Where enrollment now exceeds 1,100,000 active users. Driven by a combination of strong leverage over the cost structure, improving efficiency and a contribution from performance based payments earned during the quarter.

Speaker 2

The Integrated Care segment delivered $63,000,000 of adjusted EBITDA for now or a margin of 16.8%, which we believe demonstrates the leverage that's inherent in the integrated care business model. Turning to BetterHelp, we recorded $286,000,000 of revenue in the quarter, up 8% year over year and within the guidance range provided last quarter. 3rd quarter margins for BetterHelp improved nearly 500 basis points for not only the Q3, and we're on track to deliver material EBITDA growth again in the 4th quarter, Which is typically BetterHelp's seasonally strongest quarter for margin. After scaling rapidly to surpass $1,000,000,000 of revenue last year, We have since taken a more balanced approach to growth and margin at BetterHelp. This means we'll continue to prioritize profitable growth that meets or exceeds our return requirements.

Speaker 2

Customer acquisition costs remain near the midpoint of our outlook range. For now. Combined with stable gross margin trends, that means we anticipate landing near the midpoint of our prior full year segment revenue and margin guidance for better help. The second theme I want to cover is client demand, where the environment remains for our whole person care solution. In thinking about the selling season so far, I'd call out 3 key trends.

Speaker 2

For now tracking in line to moderately ahead of the same point last year. We're seeing strength across all key products and channels. For now. Through the end of the Q3, chronic care sales represent just over half of our total bookings in the U. S, up incrementally from the same point last year.

Speaker 3

For now. Next, we've seen

Speaker 2

particular success in pulling through chronic care sales and enrollment via our whole person bundled solutions. We're increasingly selling access to multiple chronic care programs at a single bundled price point. For example, clients purchasing our diabetes plus bundle enable access to multiple chronic care programs, for diabetes management, hypertension and weight management. This has the benefit of removing friction by creating a simpler contracting path, opening access to all programs from day 1 and driving better engagement and outcomes for our clients. It also meets the member where they are, with more than 1 quarter of Americans diagnosed with multiple chronic conditions.

Speaker 2

And by delivering more value to the client, it enables us to unlock better economics. Over the past 12 months, more than 2 thirds of our chronic care deals included our whole person bundled solutions. For now. That's helped drive faster program adoption, resulting in total chronic care program enrollment growth of 13% year over year. Finally, not only are we seeing growth within our existing client base, but we're also seeing significant competitive takeaways.

Speaker 2

This is a direct result of other players struggling to deliver for their clients and in some cases for not a fall out from unprofitable business models with weak balance sheets. During the Q3, we added nearly for another quarter. While our Q3 results and selling season to validate the value that we're delivering for our clients and members. We also recognize that there is still even greater potential to unlock business performance. We have built a strong and durable foundation for efficient growth, increasing profitability and generating cash flow.

Speaker 2

You've heard us talk about a more balanced approach to growth and margin. In 2023, we're demonstrating that we can drive for non GAAP financial measures. We will continue to focus on We will continue to focus on improving bottom line performance and we're confident that we can continue to deliver significant EBITDA margin expansion, particularly within the Integrated Care segment. There are a few things that give us a high level of confidence in our ability to deliver EBITDA and free cash flow growth well in excess of revenue growth over the next few years. First, we are exiting a period of elevated investment following the Livongo transaction.

Speaker 2

As many projects wrap up, like our integrated app that launched this year, We expect moderating costs will allow us to drive material operating leverage over the cost structure as we grow our top line. 2nd, over the past 12 months, we have broadly sharpened our focus on improving efficiency across the organization. You've seen those efforts begin to bear fruit this year as EBITDA and free cash flow have consistently exceeded our own expectations, for now, which leads me to 3. We're disappointed with the valuation of the stock today, which we don't believe adequately reflects the value we are driving today and will continue to drive in the future. At the same time, we also know there are significant opportunities to add value through improved business performance.

Speaker 2

To that end, we recently kicked off a comprehensive operational review of the business. This review includes 2 broad components. First, we have undertaken a portfolio assessment to identify any opportunities to sharpen the focus across our portfolio of products and services and ensure our investments remain highly selective and prioritized in the direction of our integrated whole person care strategy. 2nd, we are pursuing a comprehensive review of our cost structure. Following our cost reduction efforts earlier this year, We are confident that we have the right operating structure in place to support the next phase of our growth.

Speaker 2

Meanwhile, We are actively working to identify opportunities to improve upon this operating efficiency. For example, As a part of that exercise, we have begun standing up centers of excellence that will leverage shared services across the business to enable a more efficient operating structure. We are committed to a thorough review and analysis and we are working with a third party to bring an independent perspective. In short, we are accelerating our efforts to ensure that our business is operating as efficiently as possible in order to drive profit growth at a level that is meaningfully higher for now, our revenue growth over the next few years. We will do this by fully tapping the operating leverage that is a market differentiator for Teladoc Health as the leader in digital health at scale.

Speaker 2

And we will do this while ensuring that our business remains centered on our mission and that no efficiencies are taken at the expense of keeping our promises to our clients or caring for our members. We look forward to sharing more details on these efforts in the coming quarters. And with that, I'll turn the call over to Mala to review the Q3 and share our forward guidance.

Speaker 4

Thank you, Jason, and good afternoon, everyone. 3rd quarter consolidated revenue of $660,000,000 increased 8% year over year. For now. 3rd quarter adjusted EBITDA was $88,800,000 above the high end of our guidance range, representing a margin of 13.4%. Consolidated net loss per share for not only the Q3, but also the Q3 was $0.35 compared to a net loss per share of $0.45 in the Q3 of 2022.

Speaker 4

For now. Net loss per share in the Q3 includes amortization of acquired intangibles of $0.42 per share and stock based compensation expense of $0.32 per share. 3rd quarter free cash flow was $68,000,000 compared to $20,000,000 in the Q3 of 2022. We ended the quarter with over $1,000,000,000 in cash and equivalents on the balance sheet. Turning to segment results.

Speaker 4

Integrated Care segment revenue increased 9% year over year for now to $374,000,000 in the 3rd quarter, growing 4% sequentially. The largest contributor to year over year integrated care revenue growth was chronic care followed by Primary 360. On a sequential basis, the primary contributor to Integrated Care segment growth was the ramp up of enrollment in chronic care programs. During the quarter, we added 49,000 new enrollments in chronic care programs, bringing total year to date net enrollment growth to over 100,000. We ended the Q3 with chronic care enrollment of $1,120,000 an increase of 13% year over year for now and 5% sequentially.

Speaker 4

The biggest drivers of new chronic care enrollment year to date have been hypertension, which is now approaching 30% of total program enrollment, followed by our diabetes prevention and weight management programs, which have each crossed the 100,000 enrollment mark this year. Program enrollment growth has been bolstered by our success for now. In selling our bundled chronic care management solutions. In total, the Integrated Care segment added over 4,000,000 members during the Q3 ending at $90,200,000 The significant membership growth during the quarter was primarily a result of a large competitive takeaway during the quarter. Average integrated for nonrecurring care revenue per U.

Speaker 4

S. Member of $1.41 increased $0.01 over the prior year's quarter and was flat sequentially. For now. Excluding the large new population added during the Q3, revenue per member increased $0.04 sequentially. For now.

Speaker 4

3rd quarter Integrated Care adjusted EBITDA was $62,800,000 for now representing a 540 basis point margin expansion over the prior year's Q3. For now. That margin expansion was driven by higher gross margin due to an increased mix of subscription revenue, for now. An increase in performance based revenue earned during the quarter and improved operating efficiency, particularly on the G and A line. For now.

Speaker 4

The margin outperformance versus our Q3 guidance was primarily driven by lower expenses, for now, again, most notably on the G and A line. Turning to BetterHelp. Revenue increased 8% year over year for now to $286,000,000 in the 3rd quarter, a decline of 2% sequentially, in line with our guidance range. For now. Average monthly users increased 5% over the prior year's quarter.

Speaker 4

3rd quarter BetterHelp adjusted EBITDA was $26,000,000 resulting in a margin of 9.1%. For now. This represents a 490 basis point increase over last year's Q3, for now. A reflection of the more stable advertising environment compared to the prior year as well as sustained gross margin improvement. For now.

Speaker 4

Now turning to forward guidance. We expect full year revenue to be in the range of 2.6 for now to $2,625,000,000 representing growth of approximately 8% to 9%. We now expect full year consolidated adjusted EBITDA to be in the range of 320 for now to $330,000,000 representing year over year margin improvement of approximately 200 to 2 25 basis points. We now expect full year free cash flow of approximately $175,000,000 for now, up from our prior expectations of $150,000,000 For the 4th quarter, for now. We expect revenue to be in the range of $658,000,000 to $683,000,000

Speaker 5

for now.

Speaker 4

Assumed in the 4th quarter revenue outlook is high single digit percent year over year growth in our Integrated Care segment for now and low to mid single digit year over year growth in our BetterHelp segment. One thing I would remind you of, which we've discussed previously, is that the cadence of BetterHelp advertising spend in 2023 is more heavily weighted to the first half of the year than last year. This change in ad spend cadence for not only the results in quarterly year over year comparisons that favor the first half of twenty twenty three to the detriment of the second half of the year. For now. Therefore, we do not see the year over year growth rate expected in the Q4 as reflective for now.

Speaker 4

Of the underlying growth in the BetterHelp business. 4th quarter consolidated adjusted EBITDA is expected to be in the range of $107,000,000 to $117,000,000 The adjusted EBITDA outlook for the 4th quarter for now. Assumed Integrated Care segment margins between 11.5% 12.5% and 4th quarter Better Health segment margins for now between 22% and 23%. As discussed throughout the year, our prior guidance for now. Assumed a modest deterioration in the cost of customer acquisition at the low end of the range and an improvement at the high end of the range.

Speaker 4

For now. Recent customer acquisition costs continue to trend within that initial outlook range, albeit in the lower half of the range. For now. We believe trends are likely to persist in this range through year end and you see that reflected in the revision of the high end of our revenue guidance. With that, I will turn the call back to Jason.

Speaker 2

Thanks, Mala. Before we go to questions, I do want to share some work that we are particularly proud of in the wake of so much tragedy in recent days. As you may have heard, BetterHelp is offering therapy to anyone impacted by the war in Israel and Gaza at no cost. The support applies to anyone affected by the war anywhere. As some of you know, BetterHelp frequently offers therapy at no cost to those in need through our social impact program.

Speaker 2

In the past 18 months, we have responded to the Maui fires, for now. Hurricane Ian, the war in Ukraine, the Robb Elementary Uvalde shooting and Midwest flooding among other crises. While no one has all the right answers right now, I'm pleased that BetterHelp and Teladoc Health can make a positive contribution for not only the Q and A session. With that, we'll open it up for questions. Operator?

Operator

We ask that you please limit yourself to one question and one follow-up. We will pause here briefly as questions are registered. The The first question is from the line of Lisa Gill with JPMorgan. Your line is now open.

Speaker 6

Thanks very much. And Jason, I just have to say that that's a wonderful thing that you do. I know this is a really difficult time for a number of people. I really want to focus on a Two things. I know I always ask about the selling season, but I want to focus on 2 areas and that's really around Integrated Care, the margins we saw this quarter, How you're thinking about that business going forward?

Speaker 6

The significant wins that you said competitively you had 4,000,000 lives that shifted over to your for now. Integrated offering. Can you maybe just talk to me about the competitiveness in the marketplace today? What you saw in the selling season? I'm sure you don't want to name who you took those 4,000,000 lives from, but can you talk about were they single point solutions?

Speaker 6

Were they from other parties that you feel are fairly competitive to you. Just how do we think about how you're positioned on a go forward basis, especially on the integrated side of your business.

Speaker 2

Yes. No, thanks Lisa. I appreciate that and thanks for the comments on our work with BetterHelp. If I think about the competitive landscape, I think the incidence of us selling bundled solutions for not only the Q1, but it really speaks to the power of the breadth of our offering and how that is significantly differentiated from anyone else in the market. For now.

Speaker 2

As we've talked about, the majority of our chronic care management programs make up the majority of our bookings And the majority of our chronic care management solutions are sold as bundles of services. We're also seeing very significant for not wins where we sell additional products and services into existing clients. In many of those cases, We're replacing single point solution or more narrow solutions by adding our products into those clients. And so I would say that the dimensions of our competitive wins come into really 3 categories. 1 is where we replace a single point solution with either a bundle of solutions or by selling additional products into an existing client.

Speaker 2

2 is where our clients have sorry, our competitors have failed operationally and or in terms of the value proposition for the clients and our proven track record of success and value creation for not wins the day. And 3 is where we're replacing someone who quite frankly is faltering in this current economic environment because they have a business model that and an economic model that isn't sustainable And we're seeing them struggle either to raise capital or quite frankly do exist at all as a going concern. So we've seen all three of those. The biggest one this quarter That represented the largest competitive win was the latter where we saw a competitor fail And we were able to step in and replace them. And I think that really speaks to the strength of our balance sheet and the strength of our financials.

Speaker 2

And I think we've said we said last quarter, Mala and I have never spoken to so many CFOs at clients for now and prospects who are really kicking the tires to make sure that the partners they engage with are going to be here not just today but into the future and be able to grow with them. The second part of your question or maybe the first part of your question for now. Was about integrated care margins. Mollie, do you want to speak to that?

Speaker 4

Yes. I'll speak to that, Lisa. So if I Take a step back and look at our Integrated Care margin performance in the Q3 and I look at it visavis year over year where, as we said in our prepared remarks, we expanded by 500 basis points. Or even if you look at it sequentially, where we have had a pretty sizable improvement, for now. Over 600 basis points in our Integrated Care margins.

Speaker 4

There are a few factors and drivers across both that stand out. First of all, it is the growth that we are seeing in our chronic care book, right? So as we've talked about, that has a nice pull through to gross margins And we are seeing leverage from that. We've also talked about the fact that in the Q3, we saw for now. Revenue growth in a more balanced way across both chronic care and primary 360.

Speaker 4

So we are seeing the pull through of that revenue growth in the integrated care side. We are seeing the results of our cost controls and the cost efficiency programs that we have already put in place this year. We are seeing the benefit of that. And as Jason talked about in his prepared remarks, As we look at the do an operating review across our business, certainly we will look to additional areas where we for now and drive cost efficiencies. So that will be a continuing theme.

Speaker 4

Look, we also had, as we talked about in our prepared remarks, for some amount of benefit. It's about $4,000,000 from our performance guarantees that really was about that we recognized for now. Because of the outcomes we have driven, that was in if you look at the overall for contribution to our margin expansion, it was about 100 basis points. So if you really look at what's driving for now. The margin expansion, it is the revenue mix, and it is the cost efficiency for not only the programs that we have put in place and we will continue to focus on that.

Speaker 4

Thank you.

Operator

For now. Thank you for your question. Next question is from the line of Ryan Daniels with William Blair. Your line is now open.

Speaker 7

Thanks for taking the question.

Speaker 2

One for you on

Speaker 7

the chronic care book of business. I think you mentioned hypertension for now. It's about 30% and seeing strong growth in diabetes and weight management. So curious what your longer term thoughts are on the impact potentially to that business either favorably or unfavorably from all the GLP-one data that's coming to market.

Speaker 2

Yes. Thanks, Ryan. As we said earlier in the year, we don't really anticipate any material financial impact from the new program that we launched and announced earlier in the year. This year, we think that that will have an impact for us for now. In the future and we expect to participate in being able to take advantage of some of the benefits of GLP-1s for people who are living with diabetes as well as for people who engage with our diabetes prevention and weight management programs.

Speaker 2

So we see that as paying off for us in the future. We also see quite frankly The market is very engaged in this and our clients are looking to us for solutions, especially because of the cost of those medications. With respect to whether that's going to be a headwind, Yes. I would say probably the hype has gotten ahead of the reality With respect to the GLP-1s, I mean, I think I saw an analysis recently where some people said that the Airlines, we're going to save on fuel costs when the country engages with GLP-1s and collectively loses weight. I think that for an increase year over year and is expected to increase by over 25% in the next 10 years.

Speaker 2

Well, I think that GLP-1s can have an impact on maybe moderating that rate of growth. For now. I really don't think and I wish it weren't the case, but I don't think we're going to suddenly see a massive decline and the need for people to engage in more comprehensive solutions that include behavior change with respect to activity, with respect to nutrition, with respect to mental health care. And so I think GLP-1s And really we view them as a tool to enhance those programs, but don't really see them for not only the Q1, but also again going back to my initial comments, you have to take it in the context for not only the cost of those medications and the need for our clients to engage in programs that help manage the overall cost of them.

Speaker 5

For now.

Speaker 7

Okay. That's super helpful. I'll hop back in the queue. Thanks so

Operator

much. Thanks, Ryan. Thank you for your question. Next question is from the line of Jalendra Singh with Truist. Your line is now open.

Speaker 8

Thank you and thanks for taking my questions. I understand we need to wait for a detailed 2024 guidance until Q4 earnings call. But I was wondering if you could give any directional color for now. Or qualitative color on revenue and margin trends. So any additional puts and takes we should keep in mind across those two segments as we think about 2024 next year?

Speaker 5

For now.

Speaker 2

Yes. I guess I'd say a couple of things and then I'll hand it to Mala for some color. I think what you heard us say today is that you can expect us you can expect to see our EBITDA grow faster than our revenue for the next couple of years. And that certainly will hold true or that's part of our expectations for 2024. I think you heard us talk about the selling season today for Integrated Care being in line to modestly ahead of from where we were last year at this time.

Speaker 2

We have a couple of months still left in the selling season and we see our late stage from the pipeline pretty flat relative to where it was this year. So that should give you at least a little bit of color relative to where Our integrated care segment will be and client retention there continues to be in the 90s. So no material change there. And then on the BetterHelp side, I think you heard Paula say That we continue to take a more balanced approach than we had historically to revenue and And margin growth there, and that you shouldn't view the 4th quarter as for not expected of giving 2024 guidance at this point. We expect we'll do that in the Q1 of next year.

Speaker 2

But I think those are the components and ingredients that should go into your outlook. Mala, did I miss anything there?

Speaker 4

I would just add a little bit more color on BetterHelp specifically. Thinking about the starting point for 2024, Jalendra, I'd think about 2 things.

Speaker 5

For now. We have said this several times

Speaker 4

up until now. The quarterly comps line up very differently this year relative to last year. And they so I will think about if you think about the Q1, Think of it as above run rates, the 4th quarter as lower than the true run rate due to the year over year comps. When I talk about year over year comps, it's about ad spend as well as the revenue growth, right? Just as a reminder, for now.

Speaker 4

What we've been saying all year is, the ad spend cadence was going to be very different this year versus the last year. For now. Last year, over half of the ad spend took place in the second half of that year. This year, it's the opposite with half of the spend taking place in the first for now. So that's sort of the first thing to keep in mind.

Speaker 4

The second thing I'd say is on a full year basis, If you think about BetterHelp revenue, as per our guidance, has decelerated each year over the last for another 2 years and that's happened for a few reasons, right? One is this business has scaled pretty rapidly over a short period of time. For now. It's just simply a much bigger business today. So law of large numbers, you're just not going to see it continuing to grow for not adding those hyper growth rates annually.

Speaker 4

The second thing I'll say is, as Jason just talked about, we are managing the business for now. Differently, we are balancing top line growth as well as bottom line growth and cash flow. So certainly, that for now. Balanced approach has an increasing focus on driving ROI and margin. And that is in instances going to come at a lower overall rate of top line growth.

Speaker 4

And then the last point is, if you look at this business, which is the largest for not only the next quarter, but also the largest advertiser of virtual mental health. For now. And unlike many of our smaller peers, our scale enables us to drive and earn strong returns for now. On our spend and that gives us a real advantage. We have talked about this before, but there's only so much incremental ad spend and customer acquisitions you can drive in any short period of time.

Speaker 4

There's just a natural growth to that every year as the market shifts more and more for now towards virtual and as the channels themselves grow. So that does limit the amount a DTC business can profitably grow year after year. So all of this just to lend some color to the dynamics that we are certainly seeing in the Better Health business.

Speaker 5

For now. Very helpful.

Operator

Thank you. Thank you for your question. The next question is from the line of for now. Your line is now open.

Speaker 7

Yes. Thanks for the questions. Jason, maybe more details on how you're Thinking about investments going forward, you talked a little bit about it, but I just how big of a change is this compared to past for now. And it sounds like you're being more, restrained. So I'm just curious examples of what maybe gets prioritized?

Speaker 2

Yes. A couple of thoughts there, Richard. I think first of all, it's important to put it in In the context of where we've come from over the last couple of years, we're emerging from a significant investment cycle during which we've spent a lot of time and effort building and integrating post Livongo acquisition. And so now I think it makes sense for us to look across the organization for further ways to enhance business performance And part of that is focusing our investments on the areas where not only are we going to get the greatest return, but also are closest to the center of the bull's eye of our strategy. I think that also you'll see in for now.

Speaker 2

The continued progress we're making on capitalized software, you've seen that this year and I think you'll see that again next year for now. As we move into more focused investments and less quite frankly foundational for not only the investments on big chunks that have helped to get us to this point, but also put the platform in place for us to move for now. You've seen that with our integrated app. You've seen that as we've migrated some of our Internal ERP and Financial Systems, you see that as we put in place some of the capabilities that enable us to deliver A true integrated experience for Primary 360. And so we'll continue to focus on delivering that whole person care in a differentiated manner, but also making sure that we're for not judicious in making sure that we're delivering the return on capital spend.

Operator

Okay. Thank you. For now. Thank you for your question. The next question is from the line of Charles Rhyee with TD Cowen.

Operator

Your line is now open. For

Speaker 9

now. Hi. This is Lucas on for Charles. I want to ask about the performance guarantees that you recognize from generating for positive outcomes. I'm assuming this is related to value based arrangements.

Speaker 9

What portion of your guys' Integrated Care segment is derived from these sorts of value based arrangements or at least engagements that enable you to recognize for performance payments. And then can you give us a sense on how these are structured and how you can earn from them?

Speaker 4

For now. Yes. Thanks for the question. The way I would think about it is, on a run rate basis, the amount for now. Our performance based revenue tied to clinical outcomes would be in the for not only a single digit percentage of our total integrated care segment revenue.

Speaker 4

So just to give you for not

Speaker 5

taking any questions. Some sort of

Speaker 4

dimensions on the size of that. And the other thing I would say is, for now. We have a long history of performance against these clinical measures. We have a lot of data to support our analyses. We feel very comfortable in terms of our ability to perform against these outcome guarantees.

Speaker 4

For now. As I just said, it's a relatively small percentage of our revenue today. And finally, for now. We also believe that we take an appropriately conservative approach in recognizing performance based revenue. For now.

Speaker 4

So all of it to say, this is work contracts that Certainly, we have been used to delivering against for some time, supported by data, And it is a relatively small percentage of our overall revenue book today.

Operator

For now. Thank you for your question. The next question is from the line of George Hill with Deutsche Bank. Your line is now open.

Speaker 3

For now. Hey, good afternoon guys and Jason and Malin. Thanks for taking the question. I guess, so I would have a question on BetterHelp and Mala, I recognize the guidance that you gave for Q4. For now.

Speaker 3

My question is kind of now that we're about a month past the Q3 close, I guess I would just ask, like is that business from a membership perspective basically tracking in line with expectations now. And then Jason, one for you quickly would be as it sounds like the company wants to for not taking a pretty broad approach to a cost cutting program. I don't know if there's any way to kind of size order of magnitude in the way that you're thinking about what the opportunity looks like inside of the cost structure.

Speaker 2

For now. Yes. So maybe I'll take that one first, George, and then Mala can talk about where we are. I think that Actually, maybe I'll take it. The short answer is a month into the quarter, we're right in line with where our guidance is.

Speaker 2

So I can take that for Mala. I think with respect to our comprehensive operational review, We're really looking across the portfolio to ensure that everything we do is aligned with our strategic focus and maximizing our profitable for growth opportunities. I think these efforts are really focused on operating efficiency

Speaker 5

for now.

Speaker 2

And we've stood up now centers of excellence for things like member operations, clinical operations, client operations, revenue cycle management, for now. Supply chain and purchasing, all areas where we can leverage our scale and for now. Make sure that we're driving for greater efficiency and take advantage of the opportunity to drive cost out of the business such that we can operate more efficiently. I mentioned before, We are emerging from a significant period of investment. And so it makes sense for us to really look at for now.

Speaker 2

A more right sized organization based on the cost reduction efforts that we took earlier this year And make sure that all parts of the business are contributing to our profitable growth. And I think that that is really the fundamentals of it. We don't have anything to announce today regarding what the magnitude for not only the performance improvements that we expect. And as we're in the middle of that assessment right now, I think you can expect us to give you more color on that in the quarters to come as we quantify the opportunities and then help you to tie those opportunities to what we described earlier, which is for now. EBITDA growing at a faster rate than revenue over the next couple of years.

Speaker 4

The one last thing I would add is we have talked for not only the operating expense initiatives and things we would look at. For now. I would also say if I think about gross margin and the gross margin improvement, which has for not only the Q1, but also the Q1 of 2019. Think about for better help and the gross margins that we are seeing there. We are taking steps to and initiatives to improve therapist for now.

Speaker 4

Productivity, whether it be group therapy, more digital interactions. So it's, I would say, both across for non GAAP gross margin as well as operating expense.

Speaker 3

Thank you.

Operator

Thank you for your question. The Next question is from the line of Jessica Tassen with Piper Sandler. Your line is now open.

Speaker 10

Thank you guys for taking the question. So I'm curious as you think about the kind of new guidance that EBITDA and free cash flow should grow faster than revenue over the next couple of years, Did we still be thinking about those long term revenue growth targets, the mid single digit to high single digit for integrated care and low double to mid teens for better help as being valid against that new guidance or should we think about sort of a different revenue growth rate on a consolidated basis. Thanks.

Speaker 2

Yes, Jess. So we haven't given longer term guidance for the business as a whole or the segments. I think you'll see us come out in the Q1 of 'twenty four with an outlook for 'twenty four. I think quite frankly, our the indications that we've given today about expecting to see EBITDA growing faster for now. Then revenue for the next couple of years is probably the longest outlook that we've given in the last several quarters.

Speaker 2

For now. I think as we solidify what the findings are and results from this operational review for now. That will feed into a more multi year outlook, and we'll endeavor for not only the Q and A, but I don't want I don't want to acknowledge or validate those numbers because I don't recall us giving a longer term view.

Speaker 5

For now.

Speaker 10

Got it. Thank you.

Operator

Thank you for your question. Next question is from the line of Daniel Grossleit with Citi. Your line is now open.

Speaker 5

For now.

Speaker 11

Hi, guys. Thanks for taking the question. I just have a couple on Integrated Care margins and the outlook for the remainder of the year. So if I heard you correctly at the midpoint, you for now. So talking around 3 75 basis points of degradation sequentially.

Speaker 11

I'm curious what's driving that? And then, I guess if I look at the full year, what's implied by that 4Q guidance, it's around 250 basis points of

Speaker 5

for not only the

Speaker 11

margin expansion versus when we started the year, I think you had thought it would be kind of flat to up 50 and then you changed that for now. 75 to 125 basis points now, it's significantly outperforming there. So maybe if you could just put a finer point on that and the outperformance there and for now, but we should expect going forward in fiscal

Speaker 4

2024. Yes. Thanks, Daniel, for the question. So if you think about for now. The 4Q out guide that we have given for integrated care, I'd say, for now.

Speaker 4

There are a few factors driving exactly as you said the decrease in margins. So what are those? First, the Q4 is always the cold and flu season and that, as you know, drives for not gross margin compression, right, as visit volumes increase. So that's always a factor. We are also spending ahead of member on boarding, right?

Speaker 4

As you know, we have We've talked about the strength in bookings. We have several member on boardings starting Jan 1. We are spending ahead of those client launches. For now. I would also say we continue to grow our class of W-two physician hires,

Speaker 5

for now.

Speaker 4

And we will do so in the Q4. We will increase our W-two roles. So that certainly is a small drag to margins during the quarter. And The last thing I would say is, as you mentioned, as you noted, the certainly, the for now. Performance guarantees contributed about 100 basis points to the 3rd quarter margins and that certainly has an impact sequentially.

Speaker 4

For now. On your second question around full year performance on the margins and why are we seeing the expansion, the Strength that we have seen. It really comes down to 2 big themes. Number 1 is, for now. We are seeing strength in chronic care revenue growth.

Speaker 4

That has been a consistent theme over the past few quarters. And certainly, that has exceeded our expectations when we gave the initial guide. And the second thing is all of the cost efficiency programs that we are for now. Seeing the fruits of as we have rolled through the year, and for now. Jason and I have talked about it in the last few minutes around what those are.

Speaker 4

So it's really those two things that have allowed us to outpace the margin expectations, as we have rolled through the year. For not only the presentation, as we have rolled through the year.

Speaker 11

Makes sense. And then maybe just a follow-up. I'll take a shot at fiscal 2024 as well. It seems like if anything you're going to get more margin expansion in 2024 versus what you for not achieving 23, which is around 200, 230 basis points, right? You got that operating efficiencies that might fall through and for not some other less spend on the Integrated Care app.

Speaker 11

So I'm just curious, should we think about 200 basis points, 2 50 basis points of margin expansion going forward as kind of for

Speaker 2

now. We're going to stop short of giving a magnitude of the margin expansion. But I think by definition the fact that we expect EBITDA to grow faster than revenue, You can take away from that that we are targeting margin expansion again in 2024 for now. And we'll give you more insight into the magnitude of that as we get into 'twenty four guidance.

Operator

Thank you for your question. The next question is from the line of Elizabeth Anderson with Evercore ISI. Your line is now open.

Speaker 5

For now. Hi, guys.

Speaker 12

Thanks so much for the question. I had a question about how to think about pricing, and sort of if We think about the average revenue per U. S. Integrated care member, and then on the better health side as well. Like, obviously, you've had a bunch of new Integrated care members roll on.

Speaker 12

So I just wanted to understand, is that something we should think of as kind of ramping as those members sort of for not Come and get geared up. And so that's something that we should think about maybe over the next couple of quarters as that ramps or is that not the right way to think about it? And then obviously you had a nice inflection in BetterHelp therapy revenue per user per month as well. So just how to think about the cadence for that as we kind of move forward. Thank you.

Speaker 2

Yes. I would describe Elizabeth, thanks for the question. I would describe the Pricing environment is stable. With respect to the members that we just onboarded in Integrated Care, It's really more of a revenue per member than a pricing question, because we have to activate those members to drive visit revenue. The subscription revenue stays stable over time, but visit revenue tends to ramp.

Speaker 2

That's not really a pricing question. It's more of an activation and engagement question. And then of course we always look for land and expand opportunities So that we can increase our revenue per member. So when I think about pricing, I think of it as an apples to apples basis for either a single product or a bundle of products from 1 year to the next, and we're seeing it pretty stable. With respect to BetterHelp, we're always experimenting with pricing across markets, But overall pricing hasn't changed in a notable way.

Speaker 2

I think if you're looking at for not revenue divided by user count. Any small change you're seeing period to period is primarily a reflection of mix, including the growth of the other line item, which is mostly a DTC sleep asset that's small, but growing faster. And really importantly, when you're looking at revenue in a quarter versus membership, there's quite a bit of for not there's impact within a quarter of the timing of when members come on and then start for not paying for the program and or roll off of the program. So, overall, I would say pricing has remained pretty stable in that market.

Operator

For now. Thank you for your question. The next question is from the line of Sean Dodge with RBC Capital. Your line is now open.

Speaker 7

For now. Yes. Thanks. Good afternoon. Jason, you kind of alluded to it a bit in earlier response, but just on BetterHelp, with the resumption of for non- student loan payments on October 1.

Speaker 7

Are there any updates you can provide on what you're seeing at least thus far into October? Any potential impact that's having on new adds or churn or any kind of discernible change in customer behavior? Just I guess in general around better

Speaker 2

health? Yes. We haven't seen anything in the data that suggests that that's had for not having any impact. Churn has been stable. We haven't seen significant notable change for not nor are we assuming any significant change in churn in our guidance.

Speaker 2

So I would say no, we haven't seen really any impact of that.

Operator

For now. Thank you for your question. That will conclude the conference call. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Teladoc Health Q3 2023
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