Investing: Teladoc Health, financial analysis (Part 2).

This article is not investment advice, it merely details my own thought process of a company, for myself, to reflect on my own approach; this was published purely for entertainment purposes.

*All prices are in USD

**At the time of writing this I do not own any shares in Teladoc Health (TDOC).

This is part two to my Teladoc Analysis series; part one can be found here.

Growth

Revenue

2016: $123m.

2020e (estimate): $1,091m to $1,093m.

This equates to a Compound Annual Growth Rate (CAGR) of >70%, with >80% of revenue being recurring.

This is a considerable and impressive sustained rate of annual growth. This is a strong indication of a company that is succeeding within the marketplace. It must be noted that much of this is a result of their acquisitions of InTouch Health and Livongo.

Members & Visits

Visits

2016: 1m visits.

2020e (estimate): 10.6m.

This equates to a CAGR of >80%.

Paid membership

2016: 12.1m.

2020e: 50m to 51m.

This equates to a CAGR of >40%.

Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

2016: -$40m.

2020e (estimate): $110m to $113m.

Operating Cash Flow

2016: -$52m.

2019: $61m.

YTD 3Q20 (Third quarter of 2020): $61m.

Financial Analysis

Revenue

This is a strong trend; the higher, the better. CAGR = 72.67%. This is excellent compound annual growth.

Between EOY 2016 and 2020, revenue CAGR was 54.7% – this is a really healthy rate of growth. If we projected these numbers out at the same CAGR (this is a big assumption) then in 5 years revenue *would* be, in 2025, $9,692,901.63 – an increase of 786.03%

If we were to halve the CAGR to be more conservative in our estimates then 2025 revenue at 27.35% CAGR would be $3,664,350.29 – an increase of 234.96%.

Again, these are assumptions and reality will ultimately be affected by a slew of variables and compounding factors, such as the economy, pandemic(s), company execution, the competitive landscape, innovation, and product market fit, for example. But it’s an exciting thought nonetheless, but we best not allow our emotions to get the better of us.

Expenses

Cost of Revenue

From the 1Q19 to 4Q20 there has a steady increase of cost of revenue. Let’s break down why this may be the case. It must be noted that 1Q19’s cost of revenue was 34.74% of their revenue, and 3Q20’s cost of revenue was 36.2% of their revenue. This represents an increase of 1.46%, which is significant, but it is for the benefit of an additional $60,048,000 of revenue. As a business expands, it services new customers and some businesses scale more cost effectively than others (think: Facebook and Instagram), as their business model doesn’t necessitate a significant increase in expenses to service new customers. Teladoc appears to scale relatively well, although their business model utilises labour (of medical practitioners) to service new customers, and so it makes sense that they would need to increase their costs.

2019 vs 2020

There was a significant increase in the cost of revenue between 1Q19 and 4Q20. For 2020 the total cost of revenue was $390.8m vs the $184.5m for EOY 2019 – this is an increase of $206.3m, or 112%.

Their 2020 annual report states that this increase of memberships and visits, which increases in provider fees, physician centre costs, additional personnel for these centres, and from Teladoc’s acquisition of InTouch and Livongo. Teladoc’s acquisition of InTouch cost $600m, and of Livongo, $18.5Bn.

Scaling

As a business scales, they must make capital expenditures to service new customers, as previously mentioned, however, many of these costs may result in efficiencies in the future. For example, research and development resulting in better products, more customers, more revenue, and/or higher margins. Teladoc has stipulated in their 2020 annual report that their cost of revenue and operating expenses are anticipated to increase substantially in the future. As a result, Teladoc has warned of possibly needing to raise capital in the future, and that they may never achieve profitability. Though it is important to outline how they must stipulate any possible risks to protect themselves legally, however if they really believed they would never achieve profitability, they would likely not be in business, as their sole aim as a business is to create value for shareholders through creating value for customers, in exchange for profit.

However, it is sometimes the case that companies are ponzi schemes designed to enrich founders who sell stock when the price is high, and eventually reality catches up and the stock plummets; I cannot be sure that this isn’t the case for Teladoc, however I believe that the likelihood that this is the case is low, as Ark Invest currently holds $2,358,489,178.2 of TDOC stock; Ark Invest has a stellar track record, and they make a lot of sense, and so my belief is that if this were a farce they would likely pick up on it, although this is not bullet proof logic.

Operating Expenses

Total Expenses

2018: $488,671m

2019: $633,749m

2020: $1,600,383m (1.6Bn)

Why the massive increase in OpEx?

Between EOY 2020 and EOY 2019 there was an increase in general and administrative expenses from $157.7m in 2019, to $497.8m in 2020 – an increase of 216%, or $340.1m. Teladoc’s 2020 annual report states that the InTouch and Livongo acquisitions are responsible for $283.4m of the increase. Furthermore, the remaining increase of $56.7m was because of increases in costs for provider operations centres, enhancing member services, professional fees, office-related charges, bank charges, therapist recruiting, liability insurance, and bad debt expenses, of which represent $51.4m OpEx, an increase of $21.6m from 2019.

Profit

*All numbers in 000’s.

2018

Total Revenue: $417,907.

Cost of Revenue: $128,735.

Gross Profit: $289,172.

Net Income (loss): $(97,084) – this means they (lost) $97.084m.

2019

Total Revenue: $533,307.

Cost of Revenue: $184,465.

Gross Profit: $348,842.

Net Income (loss): $(98,864).

2020

Total Revenue: $1,093,962

Cost of Revenue: $390,829

Gross Profit: $703,133.

Net Income (loss): $(485,136).

These data indicate that Teladoc is losing a considerable amount of money. However, let’s dig a little deeper before we cast judgement – why did their net loss spike so considerably? It’s simple, the costs related to the acquisitions ballooned the net loss, making it appear to be a considerable loss with respect to the operational health of the business, that is, operations without one-time costs such as acquisitions.

So what would their 2020 net loss be irrespective of acquisition costs?

General and Administrative Expenses

The acquisitions of InTouch and Livongo were responsible for $283.4m of expenses.

Advertising and Marketing Expenses

The acquisitions of InTouch and Livongo were responsible for $33.1m of expenses.

Sales Expenses

Costs of acquisitions were responsible for $78.2m of expenses.

Technology and Development Expenses

Costs of acquisitions were responsible for $74.1m of expenses.

Putting it all together…

So, if we add up the expenses directly related to the acquisitions of Intouch and Livongo, we get $468.8m.

Now, if we subtract $486.8m from the operating income of $(506,421), remember numbers in brackets represent a loss, or a negative number, we get a positive operating income of $37.621m. Now this isn’t too bad considering they are likely to snowball even harder as they have acquired two massive and value-adding businesses, thus enabling an end-to-end healthcare experience for customers, thus giving them more of a competitive advantage, thus increasing the likelihood that potential customers will choose them over a competitor, and thus increasing revenue and profit.

Final Thoughts…

In my opinion, I believe Teladoc has a lot of upside as they possess significant competitive advantage in the form of an end-to-end virtual healthcare solution, in addition to their data lead, which is the most difficult thing for competitors to overcome, that is if the data is of high-quality, of high-value, and relevant to the customer experience and/or value-adding function of the company. With respect to the acquisitions of InTouch Health and Livongo, Teladoc is in positive operating income and therefore profit, if you exclude the acquisitions of these companies; furthermore, it must be noted that these acquisitions will likely result in operating income losses for multiple years as they will continue to spread out the cost of acquisitions – however, one day, presumably, that is the company continues to grow revenue and margins stay stable or increase, at some point they will repay the debt. At this point, with effective management, Teladoc will be reaping profits and may even pay a dividend (though this is speculative, and remains yet to be determined).

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