Deconstructing the Teladoc IPO and S-1

Over 10 years ago, Michael Gorton announced TelaDoc Medical Services, a new way for patients to receive medical care. Call the 1-800 number, and within an hour a doctor would call you back. All for only $35 per visit (plus a one-time fee of $18 and a monthly membership fee ranging from $4.25 for an individual to $7.00 for a family; more on subscription fees later). The American Medical Association fired back quickly, stating that “It is important to have a first visit at least where you have a face-to-face encounter and a comprehensive medical examination.”

Led by current CEO Jason Gorevic, Teladoc has grown from 20,000 members to more than 10,000,000 in the ensuing 10 years—fueled by an enterprise-focused business model. Thanks to Teladoc, somewhere close to 300,000 people all received medical care in under an hour just last year. And yet the same arguments remain, just this time it’s in Texas. It has become obvious that telemedicine is inevitable (although that doesn’t mean we should stop advocating for interstate licensing compacts and reimbursement), and that it will rapidly consume a large share of the estimated 1.2 billion ambulatory visits per year in the U.S.

Following significant year-over-year revenue growth, Teladoc has filed its S-1 and is set to go public shortly. While the company is somewhat unique versus its competitors, the filing provides a lens into the overall telemedicine category. With the initial price range set, Gorevic is now offering everyone the opportunity to invest in the first ever telemedicine IPO.

Core financials

As with most recurring revenue businesses going public, Teladoc doesn’t yet make money. The often-sold promise of growth over profits is present here, which shouldn’t be a surprise to anyone investing. However, I was struck by the lack of operating history for a company that has been in business for more than ten years, yet only chose to provide financials for the last two. And I can see why—revenue growth over that time period is substantial. Teladoc reached $44M in revenue in 2014, representing 119% growth versus the prior year. Based on Q1 2015 results and the operating history provided, we forecasted revenue between $69-79M in 2015.

The drivers of Teladoc’s year-over-year growth are two-fold: 1) membership grew by 1.9M, to a total of 8.1M, while annual revenue per member (ARPM) grew by $2.16 to $5.37. Overall, the increase in ARPM drove 74% of the annual growth, while membership growth covered the remainder.

Utilization and volume

Teladoc offers both phone and video visits to its subscribers, with the vast majority (90% according to Politico) of visits conducted via the telephone. Teladoc has seen substantial growth in visits year-over-year, delivering nearly 300,000 visits in 2014—an increase of 135% over the prior year. More than 75% of the overall visit growth is attributable to higher per member utilization (versus increased membership). And the company is off to a strong start in 2015, with a single quarter of visits reaching 50% of the prior year total (in 2014, the first quarter accounted for approximately 20% of the year’s overall volume).

While the visit growth has been impressive, overall utilization of Teladoc services is low, with best case rates (assuming no members utilized the service twice), reaching only 3.7% in 2014—which represents growth over 2013’s abysmal 2.1% utilization rate, but is still demonstrative of the challenges Teladoc faces in first adoption. Based on early 2015 data, it looks like Teladoc will continue to grow its overall utilization rate (utilization should only be compared on equivalent periods).

Business model and competition

Over the last two years, Teladoc has earned 83-85% of its revenues from subscription access fees, charging its customers per member per month (PMPM) for their members/employees to have access to telemedicine services. On top of that, Teladoc also earns revenue from the “majority” of its customers via an incremental per visit fee. Two basic pricing schemes are offered: 1) higher PMPM access fee with unlimited visits or 2) lower PMPM access fee with an incremental cost per visit. From the S-1, there is no way to split Teladoc’s customer book across these pricing models; figures that follow are blended across all customers.

The recurring/subscription revenue business has created a substantial foundation for Teladoc, strengthening its position with both private and soon-to-be public market investors. However, for Teladoc’s customers, the fees drove the total cost per visit up to $145.66 in 2014, with the relatively low member utilization rates exacerbating the issue (customers are paying for members whether they utilize or not). This single number stands out as the most problematic figure in Teladoc’s S-1, as competitor Doctor on Demand has gone to the enterprise market with no implementation or subscription fees, charging only the incremental $40.00 per visit fee.

To date, revenue churn has been a non-issue overall, with Teladoc boasting a 104% annual net dollar retention rate. However, Teladoc has raised its subscription access fees by 71% year-over-year, indicating there must be some customer churn as price increases drive improvement in net dollar retention figures. Low churn is vital in a subscription business, and is typically helped by extending contract length. Teladoc notes that its “typical” contract is annual, thereby putting its revenue at risk each year; ten key clients (of 4,000 total) generated more than 40% of its 2014 revenue (and its Aetna relationship is responsible for 25% of its current membership). Beyond its contracts, Teladoc has built an impressive enterprise platform with deep account integration, including health plan single sign on, real-time eligibility, and real-time payment responsibility that may also increase stickiness and lower churn.

With Doctor on Demand entering the market, it begs the question of whether Teladoc will be able to continue to grow in the manner that it has in 2014 versus 2013, massively raising subscription access fees (the PMPM increase was responsible for 65% of Teladoc’s year-over-year total revenue growth). Had Teladoc maintained its 2013 subscription fees, the total cost per visit would have fallen below $100 (due to the growth in utilization rate), making it perhaps more competitive with the Doctor on Demand price point. Even at that price, the legacy of Teladoc’s subscription-based business model might be an anchor on growth.

Growth and acquisitions

Teladoc identifies a number of meaningful growth opportunities for its business. Broadly speaking, it intends to further penetrate its existing account base, grow its base of customers, and expand its service offerings.

On growing same-account penetration, Teladoc notes that its existing accounts only purchase its service for 9% of eligible beneficiaries—this figure is based upon all of its health plan partners self-insured customers being in the denominator. If Aetna is used as a case study, it is clear that Teladoc is executing on this specific growth strategy within the health plan channel (Aetna membership grew 4x from 2011-2015), although based on the 104% net revenue retention figure (only applies to individual employer accounts), it is unlikely they are seeing penetration grow within any given individual (i.e., non health-plan) account.

In a survey from mid-2014, Towers Watson noted that only 22% of large employers (over 1,000 employees) offered telemedicine, and that they expected the figure to grow to 37% by the end of 2015. This leaves substantial headroom for all telemedicine companies and Teladoc itself with a significant opportunity in a fast-growing market.

Teladoc intends to use telemedicine to cover the spectrum of care, growing out of solely low acuity, urgent care services and into primary and specialty care. They note plans to grow into chronic condition management, dermatology, and second opinions, with the broad goal of working across the continuum to “eliminate gaps” in care.

In less than two years, Teladoc has spent almost $70M acquiring other telemedicine companies. The acquisitions give a hint to its strategic growth priorities, with two acquisitions in the last 24 months focused on customer growth in the down-market, SMB segment (AmeriDoc and Consult A Doctor), and another focused on expansion of its service offering into behavioral health (BetterHelp). In its amended IPO filing, Teladoc also revealed that it had acquired StatDoctors. Based on the focus of StatDoctors, the deal appears to be part of a move into the provider channel, as many healthcare delivery organizations sort out their build versus buy priorities for telemedicine.

IPO and pricing

The window for guessing the Teladoc pricing has closed (apologies for the late analysis), as it is now penciled in between $15-17, putting the company’s market capitalization at IPO well south of $1B (assuming the midpoint). This valuation would represent an approximate 8-9x 2015 sales valuation, which is roughly in line with public HCIT SaaS forward revenue multiples averaging 7.8x the last two years (per Goldman Sachs).

Note: Teladoc competitor Doctor on Demand is a Rock Health portfolio company. Doctor on Demand was not consulted or informed about this article prior to its publishing and provided no information or perspective to support the analysis.