Teladoc Health Inc (TDOC) 2015 Q2 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Teladoc 2Q 2015 earnings release conference call.

(Operator Instructions)

I will now turn the call over to Adam Vandervoort, Chief Legal Officer. You may begin your conference.

Thank you, and good afternoon. I'm Adam Vandervoort, Teladoc's Chief Legal Officer.

Teladoc 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, President and Chief Executive Officer of Teladoc. Jason?

Thanks, Adam. Good afternoon, everyone, and thank you for joining us on our first earnings call as a public company.

We're very pleased with the strong reception from the market to our IPO, and I'm really excited by what the future holds in store for Teladoc.

I met many of you on our recent IPO roadshow, so you may be familiar with Teladoc. But for those of you who are new to our story, I'd like to start our call today with a brief overview of what we do and how we do it. After that, I'll review some of the highlights of Teladoc's second-quarter results, and then touch on the exciting growth opportunity ahead of us.

Teladoc is the first and largest telemedicine provider, delivering on-demand healthcare anytime, anywhere. We have built a network of over 1,350 board-certified physicians and behavioral health professionals who serve our large and growing membership base.

We ended our quarter with 11.5 million members, and since then, have grown our base to over 12.5 million members today. Therefore, we've already delivered on our goal of adding 1 million new members in the third quarter.

Our members can access board-certified physicians 24/7, 365, usually within 10 minutes of making the request. And our physicians are equipped to treat a wide range of conditions, from upper respiratory infections, urinary tract infections and sinusitis, to dermatological conditions, anxiety and smoking cessation. When appropriate, the physician can write a prescription and have it sent directly to the patient's local pharmacy.

We provide these services at a cost of just $40 per visit. Which is very important factor, as the consumerization of healthcare becomes increasingly prevalent, and the cost burden shifts more and more to the patient.

We sell our services to employers, health plans and hospital systems, who pay us a per member per month fee. This fee affords their employees access to our network of physicians and our platform.

From our membership base, we receive monthly subscription fee, which provides us a highly recurring and visible revenue stream. In the second quarter, these fees accounted for approximately 83% of our total revenue. Visit fees accounted for the remaining 17% of our revenue.

Teladoc's platform is both convenient to the patient, and very cost-effective solution. From a convenience standpoint, the patient can visit a doctor from their home or their office, and they aren't forced to risk further exposure to illness in the doctor's waiting room.

And from a cost perspective, telemedicine saves an average of over $200 versus a doctor's office visit, and over $2,000 versus an ER visit. This represents a meaningful cost reduction for the healthcare system, while increasing patient satisfaction and driving improved clinical outcomes.

We're on the verge of a major industry shift. Due to the convenience and cost, the number of telemedicine visits in the US is growing rapidly. In 2014, there were approximately 415,000 telehealth visits conducted in the US, up 66% year-over-year.

Teladoc is the leader in this fast-growing industry, with an approximately two-thirds market share. And we continue to outpace the industry in the second quarter, experiencing a 104% increase in our visits from the same period last year.

We believe that telemedicine can address the needs of roughly one-third of the 1.25 billion ambulatory care visits that take place in a given year. Assuming this is the case, roughly 400 million ambulatory care visits at $40 per visit represents a total market opportunity of over $16 billion. Hopefully, this overview of the Company gives you a good sense of why we all look forward to coming into work each day at Teladoc.

This is a very exciting and rapidly growing market, and we have a distinct first mover advantage. We're very well-positioned to deliver on the growth that we discussed on our IPO roadshow, and I believe our strong second-quarter results support this thesis.

Turning to the financial results, we grew our revenue in the second quarter by 78% year-over-year to $18.3 million. Our total quarterly visits grew to 125,322, or a 104% increase compared to the second quarter of 2014. Our membership expanded 48% to 11.5 million.

And finally, our EBITDA for the quarter was a loss of $15.3 million, compared to a loss of $2.3 million last year as we continued to invest in our technology, expand our product portfolio and expand our sales and marketing.

Beyond the numbers, during the second quarter, we successfully completed the transition of our call center from a third-party to an in-house solution at our new facility in Texas. Which we expect to yield reduced costs, improved service and even greater member engagement.

I'll now move to a discussion of our growth opportunities. We have a growing pipeline of potential employer and health plan clients, and our 2015 selling season is in full swing.

We continue to see employers and health plans respond positively to our strong value proposition of increasing access to care, improving quality and delivering industry-leading return on investment by driving down their healthcare costs. Some notable sales closed in the second quarter include Health New England, Prudential, Marsh & McLennan, Alcoa and PNC Bank.

In addition to our growing membership base, we are also looking to drive utilization. We aim to further engage these members with outreach via email, messaging and print to help them better realize the full benefits available from our platform. The relationship between our 48% membership growth and our 104% visit growth demonstrates the success of our member engagement strategies.

During the second quarter, we launched our next generation mobile app on iOS and expect to launch our android version in the third quarter. We've received phenomenal feedback on the usability and power of the completely redesigned app, and expect it to have a positive effect on our member engagement.

Additionally, we also see potential to grow by expanding into other clinical areas that lend themselves to a remote encounter, such as behavioral health, dermatology and second opinions. Adding features to our platform, like mobile apps, biometric devices and at-home testing. And venturing beyond acute care visits to assist health systems and healthcare providers with lower cost homecare, post discharge monitoring, wellness programs and patient screening.

In keeping with our focus on expanding Teladoc's clinical's scope, I'm very happy to announce the addition of Julian Cohen to the Teladoc team. Julian joins us as General Manager and President of Teladoc Behavioral Health.

He has an extensive background in managed behavioral healthcare, having worked at United and Cigna prior to cofounding breakthrough behavioral health. Julian and I have known each other for over a year, and I'm excited to have him focused on extending Teladoc's leadership position into the tela-behavioral market.

Before I turn the call over to Mark Hirschhorn, our CFO, to go into our second quarter financial results in more detail, I want to again emphasized my enthusiasm for the platform we've built. And my excitement over where we can go from here as the leader in this high growth market. I'm convinced that Teladoc's future has never been brighter.

I'll now turn the call over to Mark. Mark?

Thanks, Jason. This afternoon I'd like to discuss several topics.

First, I'll review the details of our recent IPO. Second, I'll provide highlights from our second quarter results. And finally, I'll provide our outlook for the third quarter and for the remainder of 2015.

As a reminder to everyone on this call, subsequent to the end of our second quarter on July 1, 2015, we completed our IPO, which was priced at $19 per share, and consisted of 9.5 million shares. This resulted in net proceeds to Teladoc of approximately $164 million, after underwriting discounts and other IPO related costs.

Now turning to the second quarter financial results. As Jason mentioned, we recorded second quarter revenue of $18.3 million. And that was a 78% increase, compared to the $10.3 million from a year ago.

We derive our revenues from two sources, subscription access fees and visit fees. Our subscription access fees accounted for $15.1 million, or 83% of our total revenues this quarter.

The 70% increase in subscription access fees was driven by a 48% year-over-year increase in our membership base, which stood at 11.5 million members at the end of the second quarter. Visit fees of $3.2 million accounted for the remaining 17% of our quarterly revenue.

We completed 125,322 visits in our second quarter, and that compares to just 61,379 visits in the comparable quarter of 2014. That's an increase of 104%.

Our gross margin came in at 74%, that's exactly where we expected to end the quarter, compared to 80% a year ago. The year-over-year decline can be attributed to a greater contribution of visit fees to total revenue. That's a great result of our successful consumer engagement strategies.

For this second quarter, our revenue mix was 83% subscription fees, 17% visit fees. That compares to 86% access fees, and 14% visit fees in the second quarter of 2014. That said, we're currently right in line with what we shared on our roadshow and our long-term gross margin target range between the mid-to low 70%.

Before moving on to EBITDA, I want to touch on the significant increase in our general and administrative expenses. For the quarter, G&A expenses totaled $16.5 million. That's an increase of 309% compared to the second quarter of 2014.

Of the $12.5 million year-over-year increase, approximately $7 million were professional fees, primarily legal fees related to the Texas lawsuit. This is consistent with what we had previously communicated on our roadshow, that we expected to incur $6 million of legal and other nonrecurring operational costs in Q2.

The other significant costs in G&A compared to last year's second quarter were $3.5 million of employee-related expenses incurred in connection with our significant headcount expansion. Headcount increased to 407 employees at the end of the second quarter, from just 149 employees at the end of Q2 last year.

In the press release we issued earlier this afternoon, we provided a reconciliation table between GAAP and non-GAAP measures. Finally, our EBITDA for the quarter was a loss of $15.3 million, compared to a loss of $2.3 million in the same period last year.

Our EBITDA came in exactly where we expected, as our predictable revenues came in better-than-expected, combined with our prudently managed investment in our operations build out and product expansion.

Earnings per share for the second quarter was a loss of $7.20, compared to a loss of $2.15 in the comparable period last year. Our weighted average common shares outstanding, which were not impacted by our recent IPO, were 2.4 million shares for 2Q 2015, versus 2 million shares in 2Q of 2014. Pro forma for the effects of the IPO, using a weighted average of 37.3 million shares, our net loss for the quarter ended June 30 was $0.46 per share.

Additionally, I want to note that on June 17, we completed the acquisition of Statdoc, a telemedicine provider focused on managed care, health systems and self-insured clients. The total purchase price of approximately $30 million was composed of approximately $13 million in cash, and the remainder in Teladoc common stock.

As I noted, subsequent to the second quarter, we completed our IPO during which we raised $164 million. These additional proceeds will provide us with significantly more financial flexibility going forward.

Finally, I'd like to comment on our outlook for the third quarter and the remainder of 2015. For the third quarter, we expect revenues to be between $19 million to $19.5 million. EBITDA loss to come in between $11.5 million and $12 million.

We expect to complete the a total of 115,000 to 125,000 visits. And net loss per share, based on 36.1 million weighted average shares, of $0.39 per share.

For the full year of 2015, we'd expect revenue to come in between $73 million and $75 million. We expect our EBITDA loss to come in between $50 million and $52 million. Total visits to come in between 520,000 and 540,000, and the resulting fourth-quarter loss per share of $0.36 based on 38.9 million weighted average shares.

For the full year 2015, we'd expect to record a net loss of $2.88 per share, based on the 20 million weighted average shares outstanding figure for all of 2015.

That concludes my review of our financial results, and I'd now like to turn the call back to Jason for his closing remarks. Jason?

Thanks, Mark.

I'm very proud of our accomplishments thus far in our Company's history. We could not have made any of these strides, including the successful completion of our IPO, without all of the hard work and dedication of the Teladoc team.

I also want to take this opportunity to thank each and every one of our partners, clients and members. I'm looking forward to keeping you all updated on our progress.

And with that let's open it up for questions. Mike, can you open up the Q&A section?

(Operator Instructions)

Lisa Gill with JPMorgan.

Good afternoon. Just a couple of questions here. First, Mark, let me just start on your side around the guidance.

Can you maybe just talk about what the key drivers are in the higher costs as we move forward? Is that just incremental legal expenses, and similar to this quarter, the employee headcount?

Thanks, Lisa. Two principal components contributing to the increase in costs for the remaining quarters. We accelerated our transition into our new operations center by two months.

So we're fully functioning in that center, no longer running two facilities. And by doing that, we've increased some of the headcount we brought on several months early to be prepared for the surge at the end of this year. And additionally, we did have some additional legal costs and regulatory costs, principally for this quarter and continuing on for the Texas litigation.

Will this change the timing? If I remember correctly, the expectation was that you were going to breakeven at some point in 2017. These incremental costs, will that change the timing of that?

No. Absolutely not.

Okay, great. And then my second question is for you Jason. I know you talked about the fact that we're still early here in the selling season, but we've been getting some questions around two things.

One, the competitive landscape. And then secondly, as people are looking to bring on telemedicine access fee versus just a straight visit fee like some of your other competitors have. Can you maybe just give us some color in the marketplace as to what you're seeing right now, and what your potential customers or future clients are saying about paying access fees going forward?

Sure. Absolutely. Thanks for the question Lisa.

So we're very pleased. We're right in the middle of the selling season, and we're very pleased with how the pipeline is shaping up right now and feel really good about 2016 selling season. Certainly, we've always been at the top of the pricing spectrum in the market. And the reason that we continue to be successful is because we deliver unmatched return on investment for our clients.

And so we're finding that both employers, health plans and health systems understand the need for subscription fees in quarter to fund the engagement strategies that we deliver for our clients. Because that's what ultimately drives utilization, engagement of the platform, and therefore, a return on investment for our clients. So we continue to see that the market is receptive, and very positively predisposed to our value proposition.

And, Jason, any changes around that strategy on the visit side? Are people looking to do anything different as we move towards 2016 versus what you saw in 2015?

No. We continue to see our model playing out as we've seen it in the past. In fact, if you look at our numbers, our revenue per member is increasing and our visit fees per visit are increasing, as well. And we see that trend continuing as we go through various mix shifts in our business that are positive for our financials, and enable us to continue to deliver on our value proposition for our clients.

Great. Thanks, and congratulations on your first quarter.

Thank you, Lisa.

George Hill from Deutsche Bank.

Good afternoon, and welcome to the public markets. Mark, my first question is going to be for you too.

If I look at what you delivered in Q2 and the Q3 guide and the full-year guide, Q4 would seem to be coming in a little lighter, even adjusting for what we think is seasonality. Should we think of that as just typical conservatism? Or has anything changed with respect to the seasonality of the business, either around the visit fee -- or I'm sorry, the membership fee or the visits? Given that it just --

No, George. We've provided for, perhaps, a broad range of the $73 million to $75 million. So clearly, we'd expect to exceed the upper limits of that range. We have sequentially increasing revenue coming from both components, visits and subscription access fees quarter over quarter coming from 2Q, into 3Q, and then into 4Q.

Okay, that's helpful. And then, Jason, just a follow-up question also on the demand environment. It was interesting how you signed the Virtua deal.

Can you talk about where you're seeing pockets of strength, and where the demand is the strongest? Whether it's in the employer sponsored book, the health plan book, the MCO book, or the ACO book whatever you want to call that. But any color on where you think we are in the demand environment, and any utilization curve based on customer base.

Yes, so I would say that the demand in the large employer and health plan market has been consistent. Consistent to prior years, and proportionately growing relative to the penetration and adoption in the market.

The two places where we're seeing more demand than we've seen in prior years are in the small and midsize businesses, and in the hospital systems. Whether that's an ACO or not. Those are the areas of the market that I think are growing. They're still smaller than the other two, but they're growing at probably a faster rate proportionately than the other two.

Okay. I'll hop back in the queue. Thanks.

Thanks, George.

Ryan Daniels from William Blair.

Thanks for taking the question. Jason, one for you. You mentioned in your prepared comments, thus far in the third quarter, you've already added 1 million lives. And I think that's nicely above what we were expecting for the full quarter.

And also if we look back to last year, seasonally, Q3 is a little bit slower. So can you talk a little bit about the strength you're seeing there, and maybe anything in particular driving the upside to your membership numbers?

Yes, sure. Thanks, Ryan.

So I would say a couple of things. One is we had talked on the roadshow about our significant opportunity in expanding our penetration into our existing clients. On the roadshow we talked about the fact that we have 50 million members of opportunity, just by increasing our penetration into our existing clients. And that has played out in the third quarter, as we've continued our expansion in especially our health plan clients. So that we see that as a very strong positive.

But in addition, we're also seeing growth in off cycle, what I would call off cycle, adds in the employer segment. And so we saw both growth in the employer segment, as well as the health plan segment. The growth from Q1 to Q2 was almost entirely employer lives. The growth Q2 to Q3 was almost entirely health plan. So I would say a good balance, but really good -- this is a good sign for us of seeing very good midyear growth.

Okay. Very helpful color. And then, as we --

And that's about a million in each group, Ryan. That was a million lives joined between Q1 and Q2, again nearly all employer lives. And then almost a million from health plan adds subsequent to Q2.

Okay. That's very helpful color.

And then a follow on to that is, the market is still nascent. But it still seems like most states are pushing telemedicine forward, making it easier to do business.

You are obviously a licensed practice in most, if not all, states today. Is that something that is driving more utilization among the insurers? They're marketing it more nationally, they're pushing it out more aggressively. Is that helping you guys above and beyond your internal sales targets?

Yes, so absolutely. The regulatory landscape for telehealth continues to improve at a rapid rate. There's no question we've seen even more recently, I think when I was on the roadshow, I was talking about 13 states that improved their regulatory environment over the prior 12 months.

We've already seen, subsequent to that, even since the roadshow, another two or three states moving in a positive direction. Health plans across the country are recognizing the trend, and rolling out telehealth more aggressively. And we see that both in our existing and our new customers.

And the broader the rollout of the platform, the easier, and more effective, and more efficient our marketing and consumer engagement strategies are. I think the relationship between our visits growing twice as fast as our membership, is a great indicator of that increasing consumer engagement.

Okay, absolutely. And then final question and I'll hop off in the queue. Just on the StatDoctors deal, can you talk a little bit more about that?

I know you mentioned in response to an earlier question, you're seeing more growth in the healthcare provider market. I think they have a little bit of a specialization there. So maybe just shed some light on that asset, and what you think that adds to the organization.

Absolutely. StatDoc was particularly strong in the provider market. And so one of the big reasons strategically for making that acquisition was to further expand our penetration and our capabilities in that area. I'm really excited to have Alan Roga, the CEO of StatDoc, leading our charge in the health system market.

And we're already seeing the benefits of that. The Virtua announcement is a good example of where we're seeing greater penetration, and really large strategic relationships with health systems.

Thanks for the color, and congratulations on the strong quarter.

Thanks, Ryan.

Jamie Stockton with Wells Fargo.

Good evening. Thanks for taking my questions.

I guess maybe the first one, and I don't know who this is for, but the visit fee had a nice uptick in the quarter. The average visit fee, I was hoping that you might be able to give us a little color on what was influencing that to start off with.

Sure. And thanks for noticing that. You're right. And when you think about Q2 2015 compared to Q2 2014, we moved up from about $22.60 net up to $25.20 almost.

That really came about as a result of the fact that the sales forces is selling far more subscription and pay for visit contracts. As opposed to some of the predecessor contracts that we had, that brought in far higher PEPM fees and unlimited visit fees.

So now the mix is starting to move in the direction that we had anticipated. Especially now as we see more health plan lives coming in, and the majority of the employer lives that are coming in will all be paying that $40 fee. And as most of you know, that fee is moving up to $45 for essentially half of our membership base on January 1, so we'll continue to see that nice uptick.

And, Mark, the mix of lives coming in being so employer heavy, did that help sustain the per member per month fee sequentially? Even though you are seeing maybe more deals where they're not so dependent on the per member per month fee?

Well as you may recall, every one of our members remits a per member per month fee to us. The range of those fees, of course, vary with the -- those large [bolus] of accounts coming in with health plans at the lowest end of the spectrum. And then all employers paying anywhere from $0.50 to several dollars based on their basis.

So everybody remits a per member per month fee to us. But really what we're seeing is now a shift away from some of the more traditional visits included contracts and more of a pay as you go.

Okay. That's great. And then maybe just one other one. The $7 million number that you threw out there, does that include the legal costs and the initial costs of the call center transaction?

Yes it does.

Okay. And then could you ballpark what you've embedded either in the third quarter or in the second half for incremental one-time-ish costs?

Sure. Those are the -- those costs we shared on the roadshow. We expected nonrecurring and one-off costs of $6 million for Q2, which we just closed. Q3 of $1.5 million. Q4 of an additional $1 million. And then compared to the $10 million total in 2015, we have $5 million in our 2016 figures.

Okay. But the acceleration that you talked about earlier to Lisa's question about the call center doesn't really change any of those numbers for the second half?

No, it does not. Because those costs have now really been captured in this basically the first month in the third quarter, and those duplicative costs are now complete.

Okay. That's great. Thank you.

You're welcome.

Sandy Draper from SunTrust Robinson Humphrey.

Thanks very much for taking the questions. The first one, probably be a pretty quick one for Mark. I'm assuming, Mark, the EBITDA numbers you're giving includes stock comp, and I just want to confirm that. And if they do, you have an estimate on what you think stock comp will be in the back half of the year?

Yes, those figures do include stock comp. They include absolutely everything, we don't provide an adjusted EBITDA. I think stock comp, it's fair to say, will be in excess of $2 million annually.

Great. Okay. That's helpful.

Second question, on the bigger picture. One of the things, Jason, that I'm getting more and more convinced of as I've talked to more people in the benefits field is when you're dealing with employers, once you get an employer benefits technology, it can be very, very sticky if you do a good job.

I'm curious when you look at the provider market and also the payer market. Is there, do you think, a similar dynamic, or is it less of a sticky where someone who maybe does it in house can go outsource it or someone who's outsourcing can bring it in-house? I'm just curious if those newer markets or different markets, is there different level of stickiness than what you typically see in the employer market?

No. We're seeing very similar retention rates in the health system and health plan markets that we are in the employer markets. I think it's for a variety of reasons. One is, you end up with, because we have very strong engagement rates, you end up with their members getting used to using the Teladoc platform. So I think if we didn't have those strong engagement rates, that might not be the case. But once they have that -- those people are accessing us directly generally. They're not -- and we're not providing a white label service or something like that.

Second is, when we are selling with a health plan, we're generally selling alongside them into their self-insured clients who are buying us by brand and by name. And so that provides tremendous stickiness, because they don't want to then switch out their entire self-insured book of business. And the health systems, we're getting deeper engagement and deeper integration with those health systems as we work with their doctors, we work on multiple more strategic level integration.

Great. That's really helpful. And then my final question and I'll jump back in the queue.

On the behavioral health side, nice to see the addition in the senior management level today. But also, when you think about -- how far along are you in terms of actually selling, rolling that product out?

And how should we think about that in terms of, is that something that's an additional service you will start to bundle in with existing clients if they want it? Is that something you can lead with? Would you be willing to sell that as a standalone? Just some thoughts about the strategy for behavioral health if it's any different than the traditional Teladoc service. Thanks.

Yes. So we're really excited about the behavioral market. When we rollout a new clinical service, we do so in a very robust, a clinically rigorous manner. So, that includes the full suite of clinical guidelines, QA programs, network intake forms and things like that.

So we've been very focused on delivering a very differentiated product to market. We're already seeing very strong results in our direct-to-consumer behavioral business, and we are actively selling our B2B behavioral product. So that's right -- we're deep in that selling just like we are the rest of our sales process for 2016.

We've seen a tremendous amount of interest. We see it both as an add-on for existing clients who have seen the benefit of our medical service, and now want to take advantage of additional services that we can bring to them. As well as new clients who want to buy a bundle of services all at once.

We're generally selling it as a bundle. We do have some interest on a standalone basis. I would say that's the exception rather than the rule at this point, but I can't say that won't be a significant portion in the future.

Great. Thanks, and congratulations on a strong start.

Thanks, Sandy.

Charles Reeve with Cowen and Company.

Thanks for taking the questions. I wanted to ask about obviously, StatDoc gives you some more capabilities here. What about other specialties are you looking at that you think are -- that you'd consider a priority? How does dermatology stack up into your wish list of capabilities that you want to add on? Let me start with there.

Yes, see you hit it on the head. We're right in the middle of our derm rollout now. Again, that will be a full network of board-certified dermatologists who provide a very clinically robust program. And so we're right in the middle of that roll out. It will be in market for January 1. So that's really the third specialty, if you look at general medicine, first, behavioral health, second, dermatology, third.

We have a smoking cessation program in the market that's a pretty unique smoking cessation program. That uses both coaching from nurses as well as MDs, who have the ability to prescribe and integrate the two of those clinical areas. And now we're actively exploring a number of additional specialties. Some of them on our own, some of them in partnership with others. Both in terms of technologies, clinical specialties, and in some cases partnerships with large health systems.

That's helpful. And can you remind me of the technology for the derm rollout. Is that self developed, or was that through a partnership? Because my understanding is, dermatology is more of a you storing the data, and that's going to review a little bit later. It's not a live event?

Yes. So it's store-and-forward capabilities in addition to live events, so we do provide the ability through video for a live interaction. But store-and-forward is one of the predominant ways that people interact with the dermatologists. And it gives you the ability to leverage the dermatology resources that are available in a slightly more efficient manner.

So we use our infrastructure that's been developed for the rest of our business. Slightly modified with modified workflows to accommodate the dermatology needs.

Okay, great. And then I had another question about Medicare. I think the way the rules stand now, reimbursement for telemedicine, telehealth in Medicare is limited. But in my understanding is that there's generally broad bipartisan support to expand that. Can you give us a sense on where you think we are from a regulatory standpoint, and how would you take advantage of that if Medicare opens up wider? Thanks.

Yes. So there's no question that the regulatory landscape is improving across the board, including even in Washington where things don't generally move as fast. And I'm optimistic that we will see movement over the not too distant future in CMS' willingness to pay for a broader array of telehealth services. They have already opened up and expanded relative to where they used to pay, and so they're showing positive movement. But I would say they haven't gone far enough.

With that said, we provide service to a number of MA providers, MA plans, as well as managed Medicaid plans, who have much more flexibility in terms of what they pay for. And we're seeing very good results in the MA market with our initial set of customers. So we're pretty optimistic, and as the market moves more and more to managed Medicare as opposed to Medicare fee-for-service, we think we'll be a beneficiary of that trend.

Great, thanks.

And one question for you, Mark, just to clarify some earlier questions. If we are having a declining set of one-time costs coming out of 2Q into 3Q, should we expect G&A, the run rate to decline? Or is that offset, because we're going to have increasing hiring costs or more headcount coming on board?

(Multiple speakers) Is this the run rate or it should be declining. Thanks.

Your run rate for G&A should be about $54 million going into 2016. You've got now a -- you've reduced those nonrecurring legal and ops center redundancy costs from $10 million in 2015 to $5 million in 2016. But that's one component of our operating costs that will be growing at the lowest rate, while advertising, sales and technology will all be growing at a faster rate in order to support the revenue runs.

We're going to exit this year, again as I said, somewhere between $73 million, $75 million. That will be about nearly a 70% increase in revenues, and of course we're looking to do something similar to that next year.

Great. And I apologize, if I could squeeze one more in here. Your long-term target for gross margin, what's the timeframe for that when you think about long-term? Are we thinking two to three years out? Just because I think that if utilization grows, I think as we all think, will continue to expand tremendously over time. Should we -- that it's mix contains a shift in favor of visits, should we assume our gross margins will eventually drop below 70%? And I'll stop there, thank you.

That's a fair assumption to assume that over the next two to three years, we'll start seeing it outside of that 70% to 75% range. Because today, we have an approximately 80% 20% access fee to visit fee mix. We'll begin seeing that shift in probably over the next several years, perhaps four to five years from now.

We'll start seeing a move from access fees representing around 60% of our revenue, and visit fees representing as high as 40% of the revenues. So it's safe to assume that those visit fees, which will be generating margins in the 20% plus range and higher, that's where they are today. Compared to those access fees, which are 90% margin generating revenues.

I think, Charles, Mark is exactly right. And I guess I would add to his comments, and it relates back to your previous question about other specialties. The additional specialties that we add on have come along with higher visit fees. Because a 45 minute session with a therapist is going to cost more than a 10 minute visit with an internist, for example. And so you'll see, along with that mix shift, you'll also see a situation where our revenue per visit will increase significantly as we add on those additional clinical services.

Okay. That's helpful. Thank you so much.

(Operator Instructions)

Dave Francis from RBC Capital Markets.

Good afternoon, and I'll add my congratulations as well.

Jason, I wanted to drill down a little bit on to some blocking and tackling utilization driver questions. As you look at the investments and the resources that you have focused on sales and marketing, can you characterize how much of that is focused on new client wins? And how much is focused inside the client base to drive engagement to utilization with folks that you've already signed up?

I'm not sure I could give you a ratio, a numerical ratio. But what I would say is, that we're very focused on both of those. And maybe the best way for me to describe it is, we have equal number of people feet on the street salespeople hunting for new business, as we have account management people who are working with our clients every day to develop and implement consumer engagement strategies to drive more utilization and more penetration into those existing clients.

In addition to that, when I look at our marketing team. We have separate marketing teams that focus -- one that focuses on lead generation and driving new sales and sales support. And another one that is entirely focused really exclusively on driving greater utilization, rolling out engagement campaigns, and working with our account management team and our clients on implementing those programs.

So when I think about it at the highest level, it's almost a 50-50 split, when I think about the way that the people are allocated. And that's because we make our business on our ability to drive utilization, engage consumers and create utilization, because we do that at a level that nobody else in the market has been able to achieve. And that's one of the big reasons that we win in the market.

So to follow on with that, as you look at some of the experience that you've had with some longer-term clients of yours. Can you talk -- and I understand this may be a little soft. But could you talk about some of the things that you've learned from some of your longer standing clients in terms of driving greater utilization, and being able to accelerate the ROI to those folks who are signing up and again drive greater utilization?

Yes. One of the greatest things that we have is we've got dramatically more data than anybody else does. Because of the volume, we're approaching our 1 millionth telehealth visit. And we'll probably see that somewhere in the third quarter to -- late third quarter to early fourth quarter in the history of the Company.

When you think about that kind of rich data set, that gives us tremendous insight into the consumer base about who uses the service, why they use, and enables us to really tailor our marketing and consumer engagement strategies to the different segments of the population. Because we understand the different pockets and segments of who's most likely, not only to use the Teladoc platform, but also who is likely to misuse the traditional delivery system. Who's likely to run to the emergency room for a sinus infection or a urinary tract infection unnecessarily, and rack up unnecessary costs.

So that gives us great data. That we can collaborate with our clients in order to drive really, really differentiated results from our consumer engagement strategies.

Okay. And then one last one to wrap up on that point. You have shown some terrific increases in utilization rates across the board. As we look at the cadence of visits as you bring on these new customers, particularly as you exit this current selling season, do you expect that there is a significant uptick as you move into the next benefit year immediately? Or does it take a meaningful amount of time before that engagement process takes hold within those new clients, and you start to see the visit rate ramp up from there? And I'll stop there, thanks.

Sure. No, Dave, that's a good question. What typically happens as a result of historically clients adding the Teladoc benefit on January 1, you end up unfortunately missing about a half of the cold and flu season. So utilization and targeted information while it's arriving in people's homes, while they're being messaged to, all of that has great effect if in fact individuals are going through a difficult season.

If they begin to learn about the Teladoc benefit into January and then start perhaps trying us into February, we're at the tail end of the season. When clients pick us up midyear and we get those off cycle edge, we tend to greater utilization solely as a result of the fact that they've had the benefit for some time.

And our account managers have been able to work with the employer or the health plan's sponsor, who join as proponents for spreading awareness. So it's typical that we'll see year over year a doubling in the utilization patterns of the employees or the health plan members.

Thanks again.

Sure.

That was our last question. I will now turn the call back over to the presenters.

So thanks, everybody, really appreciate all of your interest, your questions. I appreciate the support of all of our investors through the IPO roadshow. The IPO and then our first month and a half almost as a public Company.

I'm really excited about the prospects for the Company. The entire Teladoc team is ecstatic about where we are in the evolution of our business, our continued leadership position, and our prospects going forward. And so thanks, everybody, for your support, and we look forward to talking to you again in another quarter.

Thank you.

This concludes today's conference call. You may now disconnect.