M&A Announcement

Jun 30, 2016

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I'd like to welcome everyone to Teladoc Acquire's Healthiest You Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Mr. Adam Vanderboerdt, Chief Legal Officer for Teladoc. You may begin. Thank you and good morning. I'm Adam Vandervoort, Chief Legal Officer for Teladoc. The company intends to avail itself of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward looking statements within the meaning of that law. These forward looking statements are subject to risks, uncertainties and other factors that could cause Teladoc's actual results to differ materially from those expressed or implied by the forward looking statements. For additional information on the risks facing Teladoc, please refer to our filings with the SEC. I'll now turn the call over to Jason Gorevic, Chief Executive Officer of Teladoc. Jason? Thanks, Adam, and thank you to everyone on the call for joining us on such short notice. We appreciate it. Prior to the markets opening today, we announced that we've signed a definitive agreement to purchase Healthiest You. They're a leader in mobile patient engagement based in Scottsdale, Arizona. We believe this is an excellent strategic fit for Teladoc providing both complementary solutions as well as strengthening our distribution channel to the small and mid sized employer market. On this call, I'd like to first remind you of our acquisition strategy. 2nd, tell you a bit about Healthiest You and then I'll discuss some of the synergies we expect from this acquisition. Finally, I'll turn the call over to Mark to discuss the financing of the transaction and the financial impact to Teladoc. As the largest telehealth company, we have a unique vantage point from which to observe the dynamics in the overall healthcare and telehealth markets and monitor M and A opportunities. Telenoc has a track record of making strategic 1, acquiring complementary products One, acquiring complementary products that further our mission of improving access to high quality healthcare at a significantly lower cost and that we can sell into our base of over 15,000,000 members and 2, acquiring companies that enable us to improve our position in market segments where we're underpenetrated. Healthiest You accomplishes both of these aforementioned goals. Healthiest You is a consumer engagement platform that strives to empower its members to take control of their healthcare and related expenses by providing access to important and useful data via their mobile devices. Healthiest U makes real time connections to hundreds of health plans, enabling personalized intelligent alerts to its members. These alerts enable consumers to better understand their insurance plans and remind them potential savings opportunities at the point of sale. For example, the Healthiest You platform knows when a consumer enters a specific pharmacy and if there are any savings available it will alert the consumer of them immediately. Healthiest You and Teladoc share a common philosophy of driving telemedicine engagement and enabling the consumer to take charge of their own healthcare decisions. And I'm very excited about the value we will be able to offer to healthcare consumers. The executives of Healthiest You have each accepted leadership positions with Teladoc and we're very happy to welcome them into the Teladoc family. Now I'll turn to the synergies we anticipate from this transaction. First, Teladoc will provide the telemedicine technology operations and clinical services to the Healthiest You customer base. 2nd, acquiring Healthiest You helps us to build upon our goal of offering a broad suite of solutions to our employer and health plan partners, all with a common goal of providing consumers with better access to high quality care at a lower cost. Teladoc has been very successful engaging consumers with a multifaceted communication strategy, which includes direct mail, email, targeted digital, social media, worksite communications and several other channels. Healthiest You approached the telehealth engagement challenge from another perspective. By providing consumers with a highly valuable suite of capabilities, they were successful in creating a high frequency of interaction and stickiness with consumers. For example, 1 third of their telehealth visits originate with a consumer using their provider finder tool. The combination of these two engagement approaches has the potential to materially accelerate utilization in the Teladoc book of business. Importantly, this transaction also strengthens our position in the currently underserved small to midsized employer market. This segment of the market represents approximately 50% of the employed Americans and is the most underpenetrated market for telemedicine. It has also been Teladoc's fastest growing and most profitable segment of the market. As we've noted on previous earnings calls, we have been increasing our investment in this attractive segment of the market and improved access to this market will help Teladoc to diversify our revenue streams and more rapidly penetrate this segment. There are 2 primary reasons this transaction will accelerate Teladoc's growth in the small to midsized employer market. 1, Healthiest You has a strong broker distribution network that is highly complementary to Teladoc's broker network as less than 10% of Healthiest U's revenue comes from brokers where Teladoc has existing relationships. And 2, the Healthiest You engagement suite provides these companies with a set of tools that was previously available only to larger employers. UnitedHealth Group was an early investor in Healthiest You and on the foundation of this investment Healthiest You built a strong commercial relationship with United providing its product to several of United's market segments. I look forward to continuing to grow this important relationship and to having UnitedHealth as a shareholder in Teladoc to further cement this partnership. I also believe that many of our other nearly 30 health plan clients will find the Healthiest You product to be a highly valuable mobile engagement platform that we will be able to bring to them a broader set of capabilities. I want to comment on the similarity of Healthiest U's business model to Teladocs and the attractive economics of the company. Similar to Teladoc, Healthiest U has been successfully selling its product on a per employee or per member per month basis. And due to the broader suite of services, they have been able to command the higher price in the marketplace. This combination of Teladoc and Healthiest You will create a fully integrated combined offering that can command a PMPM of between $5 $10 in the small to midsized employer market, while also greatly enhancing the value that we provide to our customers. Once again, I want to emphasize that with this acquisition, we are further positioning Teladoc to take advantage of the fastest growing segment of the employer market, the sub-one thousand employee segment. Ultimately, this is a great strategic fit as we continue to build out our platform and expand our distribution channels. We're very excited about this acquisition and going forward we will continue to be thoughtful and strategic about other opportunities. With that, I'll turn the call over to Mark to review the financials. Mark? Thanks, Jason. Under the terms of the merger agreement, the purchase price consists of 2 components, approximately $7,000,000 of Teladoc common shares sorry, dollars 7,000,000 Teladoc common shares and $45,000,000 in cash. The $45,000,000 cash component is being funded through our recently expanded credit facility with Silicon Valley Bank. The company will be adding a couple of notable investors who had been Healthiest U preferred investors, including Frontier Capital and as Jason mentioned, UnitedHealthcare Investors, including Frontier Capital and as Jason mentioned, UnitedHealth Group. Each will become Teladoc shareholders when we close this transaction tomorrow. Healthiest U generated 2015 revenues of approximately $10,000,000 representing over 100% growth over 2014 and they generated nearly breakeven 2015 adjusted EBITDA results. Healthiest U generated revenues of approximately $8,000,000 for the 1st 6 months of 2016 and has maintained EBITDA breakeven through the first half of this year. Growth for the full year is expected to exceed 65% to 70%. Teladoc will become the sole provider of telehealth services to all Healthiest You members effective tomorrow. As a result of this transition, Teladoc will leverage our extremely scalable infrastructure and with no incremental infrastructure costs, we will be in a position to immediately service all of the telemedicine demands to efficiently and cost effectively handle the Healthiest You membership and their respective visits. To wrap up the call this morning, I want to comment on our outlook for 2016. For full year 2016, we had previously communicated revenue expectation ranges from $118,000,000 to $122,000,000 and we're now increasing that range to $126,000,000 to $130,000,000 Our guidance for our adjusted EBITDA loss range from $35,000,000 to $37,000,000 remains unchanged. Our membership, which we had expected to total approximately 16.5 to 17,500,000 members is now increased to a membership range of 17,000,000 to 18,000,000 members at year end. Our previously communicated outlook for total 2016 visits was 880,000 to 900,000 and we have now increased that to $915,000 to 945,000 total visits. For the full year 2016, we had expected to record a net loss per share between $1.33 $1.38 Our updated guidance is an expected net loss per share between $1.22 $1.27 based on a weighted average of 42,500,000 shares outstanding. Most importantly, the acquisition of Healthiest You does not change our timeline to profitability and we are still targeting adjusted EBITDA breakeven by the Q4 of 2017. Now, I'll turn the call back to Jason for some closing comments. Thanks, Mark. I just wanted to take a moment to reiterate the primary strategic assets that we're acquiring in this transaction. There are 4 of them. 1, a consumer engagement platform that when added to the Teladoc communications capabilities will improve our utilization and extend our lead on the competition 2, acceleration of our penetration of the fastest growing segment of the U. S. Employer base, the small and midsized employer market 3, a strong relationship with UnitedHealth Group and 4, a broader suite of products to sell into our existing customer base at a higher price point. Again, I want to thank you for joining on such short notice and we'll now open the call up to questions. Operator? Your first question comes from the line of Nina DeCasper with Piper Jaffray. Your line is open. Hey guys, thanks for taking the question and congratulations on this transaction. Thank you. Thanks Nina. So what portion of the revenue is generated from the United members? And then what's the ratio of the employer revenue versus the health plan revenue among the healthiest you? Suneet, about 1 third of the revenue today is generated from entities affiliated with United. And all of the revenues today are being generated about 95% of the revenues are generated from employers with 250 or fewer employees. So that's really the sweet spot of the client base. And Nina, the vast majority of the United membership with Healthiest You is in that small and midsized employer market as well. Okay, thanks. And then just one more, what's the strategy to roll this platform out to the current client base and potentially offer to the new prospective large employers? Yes. So we're as you can imagine, we've been having significant discussions around integration of the 2 platforms and rolling their product suite out to the Teladoc customer base. We think that we'll be able to do that over the course of the next several quarters. We do think that this will be particularly interesting to sort of the midsize health plan market and to some degree to the larger health plan market as it provides a single mobile solution for something that they've been purchasing multiple disparate products for. And the engagement strategy from putting that in a best of breed user interface is very significant and drives meaningfully greater engagement than any of point solutions that we've seen. Great. Thanks guys and congrats again. Thanks, Nina. Your next question comes from the line of Ryan Daniels with William Blair. Your line is open. Yes, good morning guys. Thanks for taking the questions and I'll add my congrats on the deal. Mark, let me start with one for you in regards to the revenue model. Is it primarily the per member per month fees on a similar ratio to what you're seeing in Teladoc? Or is there a little bit more transaction or less transaction oriented nature to this business model? Sure. Thanks, Ryan. Actually, 100% of the revenues are PEPM based and those revenues are generally at a multiple of anywhere from 7 to 10 times and sometimes even greater our average PEPM because they are at our highest priced channel pricing, which they've been able to generate again a PEPM of an average in the area of $5 No additional transaction fees, so 100% as opposed to our historical eightytwenty split. Right. So Ryan, they sell this bundle they sell the bundle of services which includes telehealth on a sort of on a visits included basis, similar to what we do in the smaller end of the market. But as Mark said, their larger bundle of services enabled them to command a higher price in the market. Okay. That makes sense. And then, then, Jason, you mentioned one of the four factors behind the transaction was expanding your relationship with UnitedHealth, which is obviously a strategic partner. And it sounds like you've had conversations with them. So I'm curious if it was beyond, really if they will continue to support the Healthiest You platform and any potential relationships between Teladoc and its solution set more broadly into the broader United base or is it still a little early to tell there? So I would say, although it's early for us to give any indication of whether we will have other areas of the business come to fruition. We've had very productive discussions with United over the course of this transaction. They see tremendous value from the Healthy Ass You product. And of course, we've talked about larger relationships with both the HealthiestU product as well as the broader suite that includes the Teladoc products. Okay. That's helpful color. And then maybe one last one, just a big picture on how this acquisition effectively changes your internal either R and D plans or maybe your marketing budget now that you have this as a small employer and small and midsized broker distribution channel. Does that reduce your investments there and push the focus somewhere else or the kind of status quo on the core business? Thanks. Yes. No, I think, we continue to march down the path that we have been. As I mentioned, we have been increasing our investment in that segment because of the attractive economics and opportunity in that segment. I think you'll see us shift some of those resources instead of new product development that we were embarking on. We'll shift those resources to integrating the Healthiest SKU product into the Teladoc portfolio. But I think the other thing to highlight is that Health ESU has really focused on the front end user tools, while Teladoc has focused a little bit more on an industrial strength, technology infrastructure and technology enabled operation to be highly scalable. And so we're excited about the opportunity to use the Healthiest You team as almost an innovation lab that can help us to continue to push the envelope in terms of new product development. Okay, great. Congrats again. Thanks guys. Thanks Ryan. Your next question comes from the line of Lisa Gill with JPMorgan. Your line is open. Great. Thanks very much and congratulations. My first question, Jason, is just around rolling this out to other clients. Can you talk about the timeline around that? And do you anticipate any incremental cost on your side as you roll this out to larger employers? You've talked about that this is really a smaller employer base, but will you have to make any changes to it if you're rolling it out to a larger employer or to another health plan? It's really about integrating their portfolio or their product into our larger portfolio. So we don't see significant additional incremental investment. For us, it's a little bit of a shift of resources from where we were on the front of new product development. So let me give you an example. Lisa, they have been very aggressive and forward thinking in terms of building a broker portal that really streamlines the enrollment of new groups, the commission reporting for brokers, the billing process and doing that in an automated fashion. So to be honest during our push into the small and midsized employer market, we were embarking on a project to build a similar tool. So we can now reallocate those resources to integrating the Healthy Assue product into the Teladoc portfolio rather than dedicating those resources to building a new broker portal. So that's an example of where we're going to shift resources that we were otherwise going to focus on something that HealthiestU already brings to the table. Okay. That makes sense. And then secondly, Mark, with the updated guidance for this year, it looks like you've raised your revenue by about $8,000,000 Can you just give us an indication is that that you're seeing more visits or membership coming in better than anticipated? I know you brought up the membership number as well for this year, but I'm just wondering how to think about this as it flows through the model? Yes, sure. So Lisa, what we ended up doing is bringing up all of our guidance principally for the impact of the Healthy ISDU acquisition. The only number that was brought up for our organic reasons such as higher visits was the visit number. While HealthEastU is going to contribute approximately 400,000 members, their other revenues are being brought in based on their 1st 6 months of results. We also okay. No, no, I'm sorry, you also go ahead. So I was going to say, we've been exceeding our visits number throughout the year, so we continue to see strong visit results. That's why that was brought up. Okay. Makes sense. Thank you very much. Sure. You're welcome. Your next question comes from the line of Mohan Naidu with Oppenheimer. Your line is open. Thanks for taking my questions guys. Jason, I just want to get some more clarification on the PMPM fees that you talked about. Did I understand correctly that you guys charge $5 to $10 PMPM right now on the healthiest new product or is that the potential to get there? Yes. Their PPM in that small employer market is in that range. And again, you have to understand that when they're selling into that employer market, they're selling a mobile engagement platform that offers multiple technologies built into a single user interface and includes act not only access to telehealth but also includes the visits. So that range is what they are currently commanding in that market segment. And obviously with the Teladoc telehealth platform behind that, we think that just enhances the product offering and the value of it to that customer segment. Got it. Jason, in this model, do you guys have a cap on number of visits the client can have given that it's kind of an all inclusive pricing? Yes, that's a great question. We do put in utilization caps and when somebody triggers those caps, their price has increased prospectively. Okay. Mark, one quick question for you. So now that you're going to have UnitedHealth and Frontier as shareholders, is there any lockup affiliated with these new shares? Yes. There's the typical 6 month lockup. Clearly, Frontier is joining us. They're going to be in our top 5 shareholders. And I think one of the principal reasons that we were successful in acquiring Healthiest You, which ended up for us, the scarcity value of finding an asset as valuable as healthy as you came into play as a result of the fact that we looked at nearly 100 opportunities this past year. And when our Board gives us the opportunity to look into a potential M and A target, there are a number of qualifications. And based on really substantial risk adjusted returns, we found Healthiest You in a competitive environment to be our best opportunity. And clearly, the sellers found that not we didn't offer the highest price, but we offer truly the best opportunity. United will also be a significant shareholder with total holdings just under 5%. Okay, great. I'm glad on the deal. Yes. Thanks. Well, I'd just quickly add to Mark's comments. The Board and our management team does hold ourselves to a very high standard with respect to acquisition targets. And they really have to meet the requirements of 3 things. One is it has to be a strategic fit. And I mentioned the strategy in my prepared remarks about a strong product fit and or bringing us into an underpenetrated and attractive market segment. So it has to be a strategic fit. 2nd, it has to be revenue growth accretive for us. And so we've held ourselves to a high standard given our revenue growth hard to find companies quite frankly who are growing at or above the level of growth that we're putting up. And third, it had to be a target that would not delay our path to profitability and delay that breakeven date that we've put out there for our investors. So Healthiest U met all of those criteria and quite frankly, there just aren't that many companies out there that do. Yes, I understand. Thank you so much, Jason. Your next question comes from the line of George Hill from Deutsche Bank. Your line is open. Hey, good morning guys and thanks for taking the question. I guess, Jason or Mark, first, with respect to the history of Healthy East, can you tell us anything about the stickiness of that customer base and kind of what's the average duration per customer? And then my other question would just be, is there any significant overlap between the Healthy Stew and the Teladoc customer base? Is that dialed in a minute late? So I'm sorry if you guys covered that second part already. So I'll take the overlap of the customer base and then Mark can talk about the stickiness and retention rates. So I think I mentioned George on the call that there's only 10% of the Healthiest You revenue comes from brokers that Teladoc already has a relationship with. So it's almost entirely, it's 90% additive in terms of new broker distribution relationships for us, which was very, very important as we looked at the value of the asset. And George, on your earlier question? Customer churn. On the churn side, they experienced a similar churn over a 2 year period. They were at approximately 10% and the highest percent of churn was about 15% churn. What's more important is that their clients coming through them through United and other principal distribution partners have not churned. It's their smaller standalone broker clients that have churned in and out. So the high value clients have been with them and it's been a very sticky product. Yes. And Jason, maybe just a quick follow-up then. As we think about the deal, is it too late to kind of market the offerings together kind of under at least the one ownership group for the under the loan ownership group for the 2017 benefit season or is this more of a kind of back half of 2017, 2018 benefit season where we think we can see some cross sell capture? Yes. So for our customer base, it's probably more of a back half of twenty seventeen. There may be a couple of clients who are taking a fresh look, but that's going to be in the primarily in the mid sized market, more than the very large employers and health plans. We do think we'll start to see that in the back half 2017. But as you might imagine Healthiest You has a very, very strong pipeline. And obviously we did a lot of diligence on that pipeline for January and Q1 of 2017. So we're excited about the growth prospects there. Okay. Appreciate the color. Thanks. Thanks, George. Your next question comes from the line of Dave Francis with RBC Capital Markets. Your line is open. Hi, good morning guys. I'll add my congratulations. On the operational front, Jason, 2 quickies. 1, to what degree have you gauged or had a chance to talk with your existing customer base about their appetite for some of the additional services and solutions that you're going to be bolting on with Healthiest You and kind of attached to that. What exactly does your sales organization look like into some of those larger existing customers today to be able to capture some of that additional cross sell opportunity? Yes. So Dave, we've as you can imagine, we've sort of indirectly pulled our client base. We couldn't mention the opportunity obviously. But as we look at the appetite among our existing clients for additional products and services and especially additional strategies for engaging their employees and members to drive higher utilization. There's a very, very significant appetite there. And so they are continually looking to us for new solutions that are going to drive greater engagement. I'll give you an example. We had our large account sort of client advisory group in Dallas about a month and a half ago. And the discussions there about strategies to engage their consumers were significantly far afield from sort of the straight down the middle member communications. And that gave us a lot of confidence in doing this acquisition and the license we have quite frankly to bring them a broader array of services because of the value that we've already offered. And then with respect to our customer sorry our sales organization, we now have let's say about 3 dozen actively selling feet on the street. But in addition to that, we have just about the same number of account managers who are interacting with our clients every day and bringing them new solutions. So we would see both of those organizations ultimately having the Healthiest You product in their quiver of arrows to bring to clients both on a prospective as well as on an existing basis. Okay. That's helpful. One last follow-up. I know you're not going to get into the business of providing 2017 guidance and what have you, but from a valuation perspective, is it safe to say that you're expecting a revenue trajectory similar to what the company experienced or is experiencing this year over last year going forward? Or how should we be thinking about the growth trajectory of this business in particular? Thanks. Yes, Dave, it's Mark. They obviously experienced tremendous growth over the past 2 years and quite frankly they're in a channel where we experience our strongest growth. We generate our strongest growth through this broker channel as well as generating our strongest returns, highest priced PEPM and highest margin. We'd expect them to grow anywhere from 65% to sort of 80% this year and we'd expect something in a similar range between 60% 75% 75% next year. So when we look at our expected 2017 results from the Healthiest You channel, we looked at a 5 time multiple. So we're expecting them to produce at least $30,000,000 of revenue next year and that's the premise for the construction of our acquisition price. Great. Very helpful. Thanks guys. Your last question comes from the line of Sandy Draper with SunTrust. Your line is open. Thanks very much. And I will since I'm last, I'll add my congrats here on the call as well. A couple of quick ones and then most of them have been asked. The focus of the call obviously is on the top line and that's obviously the exciting opportunity. And I think, Jason, you mentioned that there's an opportunity to redeploy some costs, so you don't have to build out the broker platform. But just thinking more broadly, are there opportunities for other cost synergies? Or how are you thinking about cost synergies versus having to invest over sort of a couple of year timeframe? Thanks, Andy. It's Mark. I'll take the question. One of the principal cost synergies in this transaction is that Healthiest You had previously paid a very high premium to have their visits delivered. This really results from a lack of critical mass. When we take over the delivery of visits tomorrow morning, the cost to Healthiest You will decline by nearly 66%. So we'll deliver those visits to the members of Healthy Stew at 1 third the cost of their previous provider. So clearly, that's something that was a big trigger for us. Secondly, we've got some duplicative costs as a result of us having a very significant infrastructure, utilizing really only about 15%, 20% of our capacity. So we're going to be in a fantastic position to integrate Healthiest You in a very similar fashion that back in 2013 2014, we had integrated our first acquisitions of very similar sized and similar natured companies. Great. That's really helpful, Mark. And so just to make sure I understand, were 100% of their customers now using, telehealth was offered or was that in part of every single bundle, so all of their customers have that telehealth service bundled into their pricing? Yes, that's exactly right. So they sell this bundle of products and services. The interface includes the ability to get a telehealth visit and a lot of the tools actually funnel a consumer to a telehealth visit. So Sandy, I mentioned about a third of their telehealth visits were generated by people who started interacting with the app and with the provider finder looking for a doctor and they were funneled to a telehealth visit. And so that telehealth interface as well as the service behind it was all bundled into all of their accounts. Okay. That's helpful. And maybe just two quick final questions. One, when you think about, obviously, the small market, to me, it makes a lot of sense because these small guys don't have a lot of resources. So buying a bundle approach makes sense. Have you how do you think about when you go to the large employers who may be more willing to say, hey, we're going to take a best of breed approach. And so we took Teladoc for our best of breed telehealth, but we've got a best of breed pricing transparency tool or prescription finder or doc phone. We've got other best of breed and we're willing to do that work. How do you think about the opportunity and the sales challenges to sell the bundled solution to the large market? And then the final question would be any thoughts about any issues, obviously, United will now be a notable shareholder. You've done very well with some other large managed care companies. Any thoughts on any risk of channel conflict now that United is going to be a notable shareholder for you guys? Thanks. Yes. So let me start with the second question. I don't see any channel conflict there at all. We have 30 health plan clients already. And so we've really avoided that by being upfront and saying, look, our job is to bring the best products and services to all of our clients. And we haven't seen any concerns there. With respect to bringing it to the larger end of the market, I would say in order of priority, we're going to have greatest opportunity to bring the Healthiest You product into the midsized employer market and the TPA market sort of first. The midsized health plan market probably second, and then the very large Fortune 5 100 and third for exactly the reasons that you described. I think it will be there are a lot of people who make their living on selecting point solutions one at a time for many of the products and services that are bundled into the Healthiest You app. And so I think it will be some time before we demonstrate the effectiveness and the greater engagement that's delivered by a single bundled solution for the larger end of the market. I do ultimately think we'll get there. But I would say in order of priority, it will follow the progression that I just described. I appreciate it and congrats again guys. Thanks, Andy. There are no further questions. I'll turn the call back over to the presenters. So thanks so much. I really appreciate again. I know it's short notice for everybody. Sorry to get you up early for an early call. I hope everyone has a great 4th July weekend. We're very, very excited as you probably hear in our voices about the prospects of this acquisition and the opportunity to work with just a great team at Healthiest U. We've been incredibly impressed. The cultures are very well aligned and I think the opportunity for us to make a very significant impact on the market is there for us to take. So thanks again and of course we'll always make ourselves available as best we can for any follow-up questions that you may have. This concludes today's conference call. You may now disconnect.