Teladoc Health Inc (TDOC) 2015 Q4 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teladoc 4Q 2015 earnings release conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Adam Vandervoort. 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 will now turn the call over to Jason Gorevic, Chief Executive Officer and President of Teladoc. Jason?

Thanks, Adam. Welcome, everyone on the call, and thank you for joining us this afternoon to review our strong fourth-quarter and full-year 2015 results. I'd like to begin with a couple of financial highlights. We ended 2015 with $77.4 million in revenues. That's a 78% increase over 2014's revenue of $43.5 million.

We completed approximately 576,000 telehealth visits in 2015. That's a 93% increase over our 299,000 telehealth visits in 2014. We ended the year with a 51% increase in our paid membership base. Our membership grew to 12.2 million members, compared to 8.1 million members at the end of 2014. Importantly, organic growth contributed over 90% of the Company's 2015 revenue, and over 97% of the Company's membership increase. These results continue to demonstrate excellent momentum in our business.

For the remainder of our discussion, I want to cover three topics. First, I want to provide some color to help quantify Teladoc's impact on the healthcare system, and how much money we saved our clients in 2015. Second, I'll discuss our continued utilization improvements. And third, I'll provide commentary on our strong 2015 selling season and new client wins, and give a little insight into some mid-year growth in 2016.

First, I'll cover the savings to clients in the healthcare system. Over the course of 2015, Teladoc saved our clients -- and more broadly, the healthcare system -- approximately $387 million by providing nearly 576,000 high-quality, on-demand and affordable virtual doctor visits. This directly translates into more than a 5-to-1 return on investment for our clients.

Veracity Analytics, led by Dr. Niteesh Choudhry, a Harvard researcher and physician at Brigham and Women's Hospital, has conducted multiple analyses of the savings generated by the Teladoc program. These studies analyzed the total cost of an episode of care for members who use Teladoc against similar populations who use the traditional delivery system. Using the most conservative results from these analyses, Dr. Choudhry found that Teladoc saves nearly $700 per visit, resulting in nearly $400 million in total savings for our clients. And that's after accounting for all of Teladoc's fees. Again, this translates to a 5-to-1 return on investment for our entire book of business.

Dr. Choudhry is in the process of completing a new study on a population of nearly 300,000 Teladoc members, and the preliminary results demonstrate even greater savings. We look forward to sharing the results when the study is complete. These impressive results support not only the sustainability of our business model, which we've discussed in previous calls, but they also demonstrate the tremendous value that Teladoc provides to our clients.

Next, I'll cover our continued utilization improvement. During the fourth quarter, visits increased faster than membership for the 12th straight quarter, indicating increased utilization across our membership base. Overall, the utilization rate for our full book of business has increased by a 40% compound annual growth rate over the last three years. This is impressive, especially when you consider that over 50% of our members have been with Teladoc less than 24 months. Given that the utilization rates for our customers typically increase by 40% to 50% per unit for the first three years, we would expect strong organic growth in our visits from our legacy clients.

At the core of these utilization trends are our highly successful engagement campaigns. In November alone, we sent communications to over 5 million members, and we saw the highest yield of any previous campaign. In fact, over the Christmas and New Year's holidays, we performed more than one telehealth visit every 10 seconds, and handled over 400 visit and registration requests per hour during our busiest hours of the day. Additionally, nearly 50% of our visits were completed during nights and weekends and holidays, delivering on our promise of improving consumers access to quality healthcare.

As a result of the strong yield from our fall campaign, we performed 184,000 visits in the fourth quarter, in spite of an extremely light flu season. Our utilization trends are a byproduct of our PMPM model, our strong consumer analytics and our proven track record of engaging members. Much has been debated about the merits and viability of the PMPM model, and we believe these results validate two things. One, the PMPM model works. And two, Teladoc's engagement campaigns are highly effective.

Finally, some commentary on our sales results. 2015 represented our best selling season ever. We added 870 new clients for January 1, including 40 Fortune 1000 companies. Among these large employers, we saw new client wins across multiple industry groups, including such household names as Dell, Sprint, Monsanto, Sherwin-Williams, Sony, Panasonic, DuPont, Kohl's and Merck.

In addition to our strong showing in the employer space, we continue to have excellent success in the health plan market. On January 1, we launched with Blue Cross-Blue Shield of Florida and with Blue Cross-Blue Shield of North Carolina. We also launched federal employee populations with two of our health plan partners, and continued our rollout into new fully insured markets with our health plan clients.

As we look forward into 2016, we have also been seeing very strong sales across all segments from mid-year 2016 starts. In the health plan segment, we will be launching four new health plan clients in the second and third quarters. Three of these four health plans are managed Medicaid plans, a market in which we've had significant success recently, including MetroPlus Health Plan in New York. And the fourth plan is a multi-segment health plan which will be transitioning to Teladoc from a competitor.

In the hospital segment, we recently announced a partnership with East Jefferson in Louisiana. And we been selected by Northwestern in Chicago. And also we been selected by another large academic medical center who will be transitioning to Teladoc from one of our competitors.

In our employer segment, we're seeing very strong mid-year sales, including Fortune 500 companies such as BP, Vanguard, Progressive Insurance, Toys R Us, UBS and dozens of other companies across the spectrum of industries and sizes. As a result of this increased visibility into sales and visit volume, we feel comfortable tightening the ranges that we communicated in January.

Finally, our recently launched behavioral health and dermatology solutions are seeing significant interest and are starting to get traction. The addition of these two offerings not only make us more valuable to our clients by offering a broader set of solutions, but also significantly expands our market opportunity, nearly doubling our total addressable market from $17 billion to now $29 billion. This is still a hugely underpenetrated market, with less than 0.5% penetration, and there remains tremendous opportunity ahead of us in telemedicine. With that, let me now hand the call over to Mark to discuss Teladoc's financial performance. Mark?

Thank you, Jason. On today's call, I'd like to discuss our fourth-quarter financial results. And then I'll provide an update on our guidance for 2016. As Jason mentioned, the fourth quarter was another very successful quarter for Teladoc. In the press release issued on January 11, we raised our earlier expectations for Q4. I'm pleased to report we completed the quarter with $22.6 million of revenue, representing an increase of 75%, compared to the $12.9 million in revenue we generated in the fourth quarter of 2014.

As a reminder, we derive revenue from two sources: subscription access fees and visit fees. Our subscription access fees accounted for $18 million or 79% of total revenue in the quarter. Our 70% increase in subscription access fees was driven by a 51% year-over-year increase in our membership base, which stood at 12.2 million members at the end of the fourth quarter compared to 8.1 million members at the end of Q4 2014. Over 97% of our membership growth and over 90% of our revenue growth was organic in 2015.

I want to also provide some perspective on the sequential decrease in our membership from the ending Q3 membership of 12.6 million members to the 12.2 million members on December 31. While this number did decline sequentially, the bulk of this can be attributed to a single payer, Health Free Public, a co-op in New York that was closed by the New York Department of Financial Services during the fourth quarter. It is important to note that timing also played a role in this sequential decline, as we started 2016 with over 14 million members.

We experienced increases in our average per-member per-month fees, both sequentially and year over year. Our average subscription revenue per-member per-month was $0.48 in the fourth quarter, and compared favorably to $0.43 per-member per-month in the fourth quarter of 2014, and $0.44 in the third quarter of 2015. Visit fees of $4.7 million accounted for the remaining 21% of our fourth-quarter revenue.

We completed over 184,000 visits in the fourth quarter, compared to 110,000 visits in the fourth quarter of 2014. That's an increase of 67%. Visit growth that exceeds membership growth illustrates our members' increased utilization, as Jason mentioned. But taking it one step further, the increased member utilization allows our clients to realize the meaningful ROI that we're committed to increasing year over year.

As I mentioned earlier, for the fourth quarter, our revenue mix was comprised of 79% subscription access fees and 21% visit fees, compared to 82% and 18%, respectively, for the comparable quarter of 2014. For the year ended 2015, subscription access fees represented 82% of revenues and visit fees were 18%, compared to 85% and 15%, respectively, for the year ended 2014. We remain confident that our revenue mix will continue to represent an increasing visit fee percentage in the near future, and will trend towards 60% subscription fee revenue and 40% visit fee revenue over the longer term.

It took us nearly 10 years to complete our 1 millionth visit, and as of January 1, we are now averaging over 77,000 visits per month. In fact, as of today, we have completed more than 155,000 visits since the beginning of the year. Compared to the same period last year when we completed approximately 101,000 visits, we are experiencing greater than 53% growth. This provides us with a great line of sight into our projected year-end visit total.

Our gross profit margin for the fourth quarter was 71%, in line with our expectations and unchanged from Q4 2014. For 2016, we believe that our gross margin profile will average in the mid- to low-70% range, as we continue to ramp up visit fees as a greater percentage of total revenue.

For the quarter, G&A expense totaled $14.1 million, an increase of 89% compared to the fourth quarter of 2014. Of the $6.6 million increase, $3.2 million was related to expanding our Teladoc employee base to support the growth of the Company. Over the past year, we increased our headcount by nearly 400 people, and ended the year with approximately 600 employees. During the fourth quarter, legal fees, primarily related to the Texas Medical Board and other litigation, accounted for approximately $1 million. In the press release we issued earlier today, we have provided reconciliation tables between GAAP and non-GAAP measures.

Finally, our EBITDA for the quarter was a loss of $12.8 million, compared to a loss of $5.5 million in the fourth quarter of 2014. Our EBITDA loss came in slightly better than our projected EBITDA loss of between $13 million and $14 million, and we anticipate quarter-over-quarter improvement as we continue our push towards EBITDA breakeven in the second half of next year. In fact, we expect that each consecutive quarter throughout 2016 will produce decreasing EBITDA losses.

Our loss per share for the fourth quarter of 2015 was $0.39 compared to a loss of $3.25 for the same period last year. Our weighted average common shares outstanding were 38.5 million shares in the fourth quarter of 2015, compared to just 2.2 million shares in the fourth quarter of 2014, when we were a private Company. With respect to the balance sheet, we ended the year with $137.3 million in cash and short-term investments, and $26 million of debt, principally from our bank lines. Due to the proceeds from our IPO, Teladoc is well-positioned to achieve profitability without going back to the public markets.

To wrap up my prepared remarks this evening, let me provide our outlook for the first quarter, as well as the full-year 2016 results, which are as follows. For Q1 2016, we expect revenue between $26 million and $27 million. We expect an adjusted EBITDA loss between $11 million and $12 million. Membership is expected to total approximately 14.5 million to 15 million members. Total visits completed come in between 220,000 and 230,000 visits. And our net loss per share, based on 38.6 million weighted average shares, are between $0.36 to $0.38 per share.

For full-year 2016, our revenue expectations range from $118 million to $122 million. Our guidance on our adjusted EBITDA loss is between $31 million and $33 million. Membership is expected to total approximately 16.5 million to 17.5 million members. And our outlook for total 2016 visits ranges from 880,000 to 900,000 visits.

For the full-year 2016, we expect to record a net loss per share between $1.26 and $1.33, based on 39 million shares outstanding. We have very high visibility into 2016's results, and we can already account for more than 90% of our annual revenue. With that, I'll turn the call over to Jason for a few closing remarks. Jason?

Thanks, Mark. Let me just close by saying how proud I am of all we've accomplished in 2015. This was a very exciting year for Teladoc, as we successfully completed our initial public offering and continued to execute on our growth strategy.

We accomplished a lot in 2015, and none of it would have been possible without the hard work and dedication of our Teladoc team. I want to thank everyone for their efforts in making our first year in the public market a success. I'm excited for what 2016 has to bring, and I look forward to updating you all throughout the year. With that, I think we will now open the line for questions. Operator?

(Operator Instructions)

Sandy Draper, SunTrust.

Thanks very much guys, a couple of quick questions. First maybe for Mark. When you look at the growth in the year on the per-member per-month, and then the average visit fee, it's up pretty nicely on a year-over-year basis. Can you just remind us in terms of that, I know there were some contracts you were getting a higher rate per visit fee, et cetera. Did that impact the entire year? How much does that spill into next year?

And then how much more pricing flexibility do you think there is in per-member per-month, as well as visit fees, on a longer-term basis? Or do you think 2016 is the steady-state?

Sandy, we've seen a product mix shift throughout quarters, especially as we continue to grow our visit revenues. Our PMPM fees have come up quarter over quarter. We had guided to about $0.01 increase each quarter. I think Q1, we'll likely see a very similar per-member per-month. But throughout 2016, we'll probably see a couple pennies increase -- again, as a result of the higher-yielding revenues coming in from our direct sales force and the broker channel.

Great, that's helpful. And then the second question, there's a little controversy -- one of the customers that you've highlighted early on that is very successful was Home Depot. You obviously won a bunch of new business, but there were a few losses. I know Home Depot has brought on another player. Just curious your thoughts on from going from somebody that was a standout-highlighted customer, what caused the transition, how's that going? And just any update, to the extent you can update or are willing to update what's going on there, that would be great. Thanks

Sure, thanks, Sandy. It's Jason. Let me start with a baseline about Home Depot. We originally sold that account through our relationship with Aetna. And Home Depot changed carriers for January 1, 2016. As we discussed in the past, the single biggest reason for us to lose an account is because they change carriers. So again, Home Depot changed carriers, they moved away from Aetna. Nonetheless, because of the value that we delivered for Home Depot, we retained a portion of that account for 2016. In fact, we retained just over 13,000 members.

We've said several times in the past that we're very confident that in a head-to-head comparison, Teladoc would stand head and shoulders above the competition, with respect to delivering operationally, financially and on all metrics. We do believe that any other telehealth company can match our return on investment. That's exactly what's happened with Home Depot.

So the account is running at an annualized 40% utilization rate through the first two months of the year. I'm extremely confident that we are delivering a utilization rate that is at least five times greater than our competitor. And when the dust settles, I'm certain we will have delivered an ROI that's many times greater than our competitor there.

Great, thanks, guys. I'll drop back in the queue.

Thanks, Sandy

Ryan Daniels, William Blair.

Hi, this is Nick Hiller in for Ryan Daniels. Thanks for taking my questions. Could you talk a little bit more about the impact in Q4 and Q1 of the weak flu season? I know it's a transitory issue and you still reported strong unit growth. But did it drive any visit weakness in your view?

The fact that the flu season never really materialized at the end of 2015 led us to decrease our projected visit volume by about 10%. We communicated that in mid-January. We're seeing, however, very strong volumes. Both January and February have hit our marks. We did want to come in on the conservative side with a year-end number, as a result of the fact that we would have still expected a strong March and April, if the flu makes any material appearance.

So does that have any reverberating effect, if you will, on the business throughout the year? Meaning, flu might usually be a great way to get use and have people see the value of telehealth early in the year, and then they know how to use it again later as sickness arises. Does losing that actually hurt momentum at all through the year?

As I mentioned in my prepared remarks, we've seen significantly greater yield from our fourth-quarter communications campaign than we've ever seen before. And that's how we were able to actually hit our visit projections and exceed them, in spite of the weak flu season. So I would say, if anything, it makes our engagement capabilities even more important, and it enables us to stand out even more, relative to our competitors. As Mark mentioned, we did 155,000 visits through the first two months of the year, which continues on our strong engagement efforts. And again, that's in spite of really having a nonexistent first couple of months of the flu season.

Okay, great, thank you.

George Hill, Deutsche Bank

Hey, good afternoon, guys. I appreciate you taking the questions. I have a few, if you'll give me a second. Jason, you talked about the pricing environment seeming pretty steady. I guess, can you talk a little bit about competitive environment? Just because you had seen so many small private companies come to market and create a lot of noise, basically since right before you guys went public. Have you seen it impact your ability to win customers? Has there been any increased noise to play through? Or just talk about what you are seeing competitively, with conversations with customers?

Actually, I think one of the best ways to illustrate it -- and we've seen, quite frankly, the competitive landscape improve over the last few months. What we've seen is that some of our competitors have faltered, both operationally and in terms of delivering on their utilization promises. And I think the market is really getting wise to that.

So my best example is, I was just with one of -- with really our top health plan sales rep, out seeing a Blue Cross-Blue Shield plan. And she was conveying to me that over the last four months, she's never been as busy in her whole career as she has over the last four months. And she's a career health plan, healthcare IT sales person. In this regard, she says that the patina is really wearing thin on some of those low-priced or free offers, and people are seeing through it to understand what's really there. So if anything, the competitive landscape has really improved over the last few months.

And I think George, that's reflected pretty well in the 2016 mid-year growth that I described. We've never seen that kind of growth this early in the selling season, and I think it's directly related to our improved competitive position.

So when you talk about that mid-year growth, am I thinking about it right, that you're -- I call this: you're in the business of fixing bad haircuts. Where somebody got started with somebody else who wasn't performing, and you get pulled in mid-year, as a mid-year start, to fix an implementation that went bad. So we should probably -- so I guess I'll ask you and I'll ask Mark, will we see a different seasonal ramp as it relates to the addition of lives than we've seen historically?

I think it's a combination of the two things, George. We're seeing good de novo mid-year growth, where an organization, regardless of which segment, is adding telehealth for the first time. But we're also seeing competitive wins, where we are taking a client from a competitor. And as I mentioned, we've seen that both with a large health plan -- that happens to be a Blue health plan that we are taking away from a competitor -- as well as with the hospital system, a large academic medical center that we're taking away from one of our competitors.

In fact, the quote from that large health plan is: five years ago, we were ahead of the game, we were ahead of the rest of the market, but we chose the wrong partner, and now we're five years behind the market. So we're seeing the benefit of that, but we're also seeing a lot of new growth. I don't know, Mark, if you want to comment on the mix?

Probably further to that answer is, over the past several years, our mid-year growth consisted principally of health plan lives, which had come in, in large boluses over the second half of the year. We already know that we've got commitments. We've turned prospects into clients that will start with us mid-year, and these are Fortune 5000 companies. So I think it's a much stronger mix towards employer clients, as opposed to our prior reliance on the health plan lives.

George, maybe one quick comment I can add to that. We have excellent line of sight into 2 million members of mid-year growth. And that's about 60% employer lives and about 40% health plan lives.

That's great color. And Jason, the next thing I was going to hit you with -- I'll dovetail this so I can hop off line -- is, I guess, if you're looking at your client bucket heat map, which segments of the market are running hottest right now from a demand perspective, versus employer sponsors, health plans, TPAs, whatever other buckets there are?

And then Mark, profitability for the year looking a little bit below what I was looking for, but you're trending the right way. Any items early in the year that might be outliers, that are one-outs from an expense perspective, that you might call out? And I'll hop off. Thanks, guys.

Yes, let me quickly take the heat map question, and then Mark will cover the profitability question. I think we're seeing our sales efforts fire on all cylinders. I would say our ASO sales are very strong, where we're selling in concert with our health plans into their self-insured markets. And we're seeing very strong mid-year growth there, where large companies are adding our benefit off-cycle.

The health plans -- as I said, we have four sales for mid-year launches in the health plan sector. And the broker sales channel is very productive, which, we're adding resources to that segment. Mark, that probably directly speaks to the profitability question.

George, when we prepared our operating plan to present to the Board in the fourth quarter, we had to prepare that within maintaining two guardrails. And one was to optimize our ability to drive profitable growth. We focused on that basically to ensure that we stay true to our commitment to achieving breakeven in the second half of next year. We presented a budget that increased our investment in the two segments that Jason just referred to. One was in the provider market. We had seen some solid success in that market in the second half of 2016, so we decided to increase our investment in the sales, marketing and product development for this segment.

The other increase really comes into the broker market, where that's been by far the strongest channel for us, and it's delivered the most consistent growth throughout the year. We increased our investment in the broker teams. It's an area where we have probably the lowest level of competition in the market. And the investment dollars there are focused on sales, service and technology investments to really help us optimize our growth throughout 2016. We imagine second half of the year, we'll start seeing the benefits of these investments will drive additional revenue, clearly setting us up for a solid 2017. But again, maintaining our commitment to achieving breakeven in 2017.

Well, good, I appreciate the color, guys. Thanks.

Sure.

Charles Rhyee, Cowan.

Thanks, guys, for taking the question here. Can I start the -- when I think about the guidance here -- and I apologize if I maybe missed it. How should we expect the ramp in membership -- you give a year-end membership. Where are we starting here in the first quarter, and what would you expect in the mid-year starts?

We had an excellent selling season this year. We're already above the lower end of our first-quarter membership guidance. Which, just to remind you, is 14.5 million to 15 million members. And in fact, we added well over 3 million new members for January 1, when you consider the known attrition that we've discussed previously resulting from the loss of the high-mark fully insured membership, and the reduction in the Home Depot account that Sandy asked about.

So in addition to this, as I mentioned, we've got great line of sight into another 2 million members over the rest of this year. So we feel very good about the guidance we've given of 16.5 million to 17.5 million members for the end of this year.

Okay. And then when I think about the visit growth here, obviously you have new clients coming on and you've got to ramp them up. Is there a way you can give a sense, sort of a pro forma, had high-mark not moved and Home Depot changed carriers, maybe what a same-store visit growth looked like? Because I think it's understated a little bit here, just because you're having probably more mature clients rolling off and new clients ramping up still.

What we've said is, our typical client increases their utilization rate by about 40% to 50% year over year for the first three years. And so that works its way through, as we add new membership. Of course, we are growing our membership at a significant rate. So more than 50% of our membership has been with us less than 24 months.

So we'll see -- what you'll see in our book of business, and I think it's fairly consistent and will remain so as we look into the future, is that the overall utilization for our entire book of business increases at about a 40% compound annual growth rate. So if you look at the entire book, two years ago we were running at 2% utilization, and last year we ran at -- I guess three years ago, we ran at 2% utilization. And last year, we ran at about 5% utilization. Anything you want to add to that?

No, I mean, to pro forma the figures for the loss of those two named accounts, you would add less than 25,000 visits to us. That's something that we can clearly make up with our marketing. And also a moderate flu season would provide that to us. So it would give you a jump, but it would be a jump of maybe 2%, 2.5%.

Okay, that's helpful. And then just one other question. I want to talk about sort of your progress in the provider market. We've talked a lot about the employer in the care market. Can you talk about how the pipeline on the provider side is looking?

Yes, I would say very strong. We've announced two specific new hospital systems recently. Plus, we'll be adding, as I said, a large academic medical center, which will be coming to us from one of our competitors. We're seeing a lot of activity in that space.

We're the only telehealth Company that has a dedicated unit that just focuses on the provider market, and a dedicated product offering that's specific to the provider market. As opposed to someone trying to retrofit an employer or health plan product to the provider market. And we're seeing that being very well-received from the providers. So I think you'll see -- it is an admittedly relatively long sales cycle. And the implementation time is longer than the implementation time for an employer, for example. But that ends up being a very sticky client that grows over time, as we can add significant additional services into that market.

So I feel very good about it. It's why we are increasing our investment in that segment. As I've said before, two years ago, nobody was buying in the hospital segment. And today, we see not only active RFPs and proposals, but also people writing checks and buying in that segment.

Great, thank you.

Lisa Gill, JPMorgan.

Thanks. It's actually Mike [Majek] in for Lisa. In the past, you talked about a significant opportunity to grow your members by expanding within existing clients. Can you talk about what portion of the growth that you're expecting in 2016 is coming from new clients versus the expansion of membership at your existing clients? And where does that overall opportunity stand at today?

Hi, Mike. Throughout 2015, we had generated strong membership additions through our health plan clients. In fact, I think since our IPO, we added about 1.5 million members from the Aetna channel. We expect to have very similar profile in 2016, with about half of our new business coming from existing clients, in existing channels. The other half, of course, coming from the direct sales and broker market, as well as the new revenues that have been generated from our behavioral services.

Got it. And then you've also done a couple small bolt-on acquisitions over the past few years. Can you talk about your interest in doing any additional deals? And whether there's any holes in your offering that you think you need to fill out, or potential areas that might look interesting?

I would say -- let me just start by saying, I don't think we need to do any acquisitions. Our organic growth has been very strong, and all of our projections are based on organic growth. With that said, we're always looking for opportunities to expand our product portfolio and/or the markets that we serve, whether it's a new market that we are not currently selling into, or one that we are underpenetrated. So we have an active business development team that's constantly looking at the market, and whether there are opportunities to achieve either one of those goals.

With that said, we have a very high bar, right? Because it has to continue to facilitate the growth rates that we've put up. We're very focused on maintaining our path to profitability. And so finding things that have the strategic fit, the growth rate and would not impede our path to profitability is -- significantly narrows the funnel. So I think you'll see us continue to be active. I can't tell you if and when we'll get any deals done, but they'll have to meet those hurdles.

Got it. Thanks for the comments.

Dave Francis, RBC Capital Markets.

Hi, good afternoon, guys. Jason, I want to dig in a little bit more of both the payer and provider channels you mentioned, as you got some new business that's just been signed in both areas. But as you've talked about the evolution of the buying habits of each of those players, it's been historically a little bit more tire-kicking and trying to figure out how telemedicine and virtual medicine fits into their business models, and what have you. Have you seen any meaningful change in the way that providers or payers are coming to market, relative to your offerings? And how they are contracting with you in terms of your membership commitments, and the like?

Sure, Dave. I'd start by saying the payer market has moved out of the early-adopter phase, well into the fast-followers. I think the payers -- partially driven by their self-insured clients demanding it from them, but also partially based on their understanding and their recognition now of the real value and impact that this can have on access to care and cost of care -- are seeing this as a need-to-have, not just a nice-to-have.

On the provider side, there are really probably three things that are working on the providers. One is simply a patient acquisition strategy. Two is a real focus on how they better-manage risk as they move toward becoming risk-bearing entities and ACOs. And three is a focus on provider productivity. So that's an area where people weren't really buying, they were asking a lot of questions. And we were having a lot of conversations two years ago, but nobody was really buying anything. That has changed pretty significantly.

And when I talk to consultants in the market who consult to the hospital systems, for example, they tell me that telehealth is top of the strategic list of questions. I don't think they have yet figured it out. And so we still get a lot of hospitals coming to us to help them create a strategy, in addition to providing them with actual solutions. Does that make sense?

That's helpful color. I appreciate that. As a quick follow-up, to circle back to the Home Depot situation around Aetna, what can you guys do to, in certain ways, protect yourselves to a certain degree from similar type of situations? Where you perhaps make a meaningful investment in an evangelism process with a membership group, only to see that, in some sort of transit way, move because the -- through no fault of your own, but the decision to switch carriers. Is there a way to carve out what you guys are doing with certain employers that you are working with through some of your payer partners? Or what other things might you be able to do to protect yourselves there? Thanks.

Sure. So you have it exactly right. The first thing is obviously for us to continue to focus on driving meaningfully higher utilization than anyone else in the market. Second is to really highlight that for our clients, and make sure that they clearly understand the return on investment that they are getting. And third is to make sure that we develop deep enough relationships with those accounts, regardless of what channel they come through, such that by the time they -- if and when they end up leaving their carrier, they stay with us.

And we have a concerted and very focused effort on making sure that those three things happen. We never like to lose an account, or even a part of an account, regardless of what the reason is. And so we're very focused on putting those three things in place, such that we can build a moat around our accounts, regardless of what their carrier decision is.

Okay, that's helpful. Thank you.

Steve Halper, FBR.

With respect to the extra investments that you are making for 2016 as you outlined, how quickly do those ramp down in order to be able to allow you to get to that breakeven mark that you've advertised to 2017? I.e., do those investments just simply go away in 2017?

No, Steve, they're going to normalize through 2017, but we end up seeing the leverage through the additional revenue that's coming on in 2017. In fact, if you look at our fourth-quarter run rate expenses, they're only going to grow 10% throughout 2016, while we've got top-line growth that's coming clearly closer to in excess of 50%. So we'll see that continue throughout 2017, and we'll see the leverage coming in from materially smaller increases in cost. And the contribution from that increased revenue is what really drives us from the EBITDA loss position to breakeven in 2017.

Got it. Thank you.

Steven Wardell, Leerink Partners.

Hi, guys, it's actually Matt Dellelo in for Steve. Couple quick ones. You mentioned, longer-term, achieving the 60/40 mix in subscription versus visit fees. Can you remind us how we should think about gross margins as you move toward that mix?

Sure. We had shared with everybody that we believe we're still going to hold at the 70% margin -- low-70%s to 70% margin for 2016. As we continue to see a ramp-up of our visits, we believe over the next two to three years, our margin profile is going to become closer to the 65% -- 60% to 65%.

That's a contribution -- today, the contribution of visits generating, based on the visit, whether it's behavioral or general medical and dermatological, we have visit margin profiles between 35% and 50%. And obviously our subscription fees are generating margins about two times as high. So when we start seeing product mix blend to that 60/40, we get a more normalized profile that's in the 60% to 65% range.

Okay, great, that's helpful. And then if you could talk a little bit more about behavioral health traction and where are you seeing that traction? When did you officially launch that capability, and what might it contribute to FY16?

Let me talk about the market traction, and I'll let Mark go through the financials. When we think about behavioral health, we think about it in two segments. One is our direct-to-consumer segment, which we really launched the beginning of 2015. And the second one is our B2B offering, which we launched for, really, first availability, January 1, 2016. So on the direct-to-consumer side, we're seeing great performance, very strong growth, really good adoption and persistency among the membership base. And so we continue to be excited about that segment.

With respect to our B2B offering, we're implementing new accounts over the course of the first and second quarters. And of course, we'll continue to do that over the course of the year. I would say, don't look for meaningful contribution in 2016 from the B2B segment. Really we're building growth adoption and penetration over the course of this year, and we'll see significant contribution in 2017.

And I think I'll add that, all that is consistent with the DTC product, except for the fact that you should expect explosive growth. While we're still penetrating a very nascent market, the fact is that in Q1 of 2016, we'll easily double the revenue we had -- perhaps triple the revenue we had in our direct-to-consumer business. We ended the year with about $5 million in revenues. We'll easily exceed $10 million. We've got great line of sight, and the attraction of the product is just gaining momentum. So we're obviously hoping that we get to see that same thing develop on the commercial product.

Great, thanks very much.

(Operator Instructions)

Charles Rhyee, Cowen.

Thanks. I just wanted to follow up here. Jason, I just wanted to ask a more broader question here. We're talking about utilization now in the 5 -- we're probably going to 6% or so as we get out in the next couple of years. As the market overall -- because obviously if you add up all the players, we're still a very small fraction of total outpatient visits. Do you anticipate we get to a point where people more generally see the value in this? And could we get more of a hockey stick inflection in terms of utilization? If so, what do you think needs to happen to get there? If not, what (technical difficulty) do that? Thanks.

Yes, absolutely. Let me start by saying it's a little bit dangerous to do a -- or misleading I guess -- to do an overall utilization over the full book of business. Because the book of business as a whole is very heterogeneous. You have certain populations where we have 50, 60, 70 -- I see a report every morning on our client utilization patterns. They have a 2,000-employee account that's operating at almost 100% annualized utilization.

So we have segments of the business that operate at significantly higher utilization rates. And others, like, as we've talked about in the past, we have large managed Medicaid populations where the client has decided -- legacy client who's decided years and years ago to put us behind a nurse line that sees very small utilization rates. So I think when you look across the entire population, it's artificially low.

So with that said, I think as we continue -- I don't write the kind of relationships that we did back in 2010 and 2011, where we didn't have so much choice. Now we know a lot better, and quite frankly, we'll say no to a client if we don't think that they're launching in a way that's going to drive meaningful utilization and strong return on investment. So I think you'll see our utilization rate continue to increase over time, as more and more companies -- whether it's an employer or a health plan, or otherwise -- adopt and integrate telehealth as a more core part of their benefit, communicate it more, promote the utilization through financial incentives. And so I think you'll continue to see that occur.

I had a great conversation with a practice leader and thought leader at one of the consulting firms yesterday, who really understands the massive difference between a company who doesn't subsidize the telehealth visit and somebody who does. And demonstrates for the client the reason that they should make it a zero co-pay for the employer. Two or three years ago, that would be unheard of, for a consultant to make that argument to the employer. Today it's happening routinely.

So I think those things are going to continue to occur. And because of the data set that we have now, having done probably 1.3 million visits in our history, we're able to much better educate our clients on what they can do to maximize their utilization.

So you think it's an issue of, benefit design changes have to come around to really incent -- to tip the scale to really accelerate -- I mean, not that we're not having great growth now. But when we think about the total utilization of telemedicine, how telehealth services' potential, even if it's more of a benefit design issue?

It's benefit design, communication and executive sponsorship. If we get those three things, and then we add in the expanding product portfolio that we bring to bear, so that we are engaging the consumer more, and being a one-stop shop for any of their clinical issues, and not just a single set of clinical issues. Those will all be a virtuous cycle that creates a snowball effect and massively increases utilization.

Great. Thanks a lot, guys.

Absolutely. Thanks, Charles.

There are no further questions at this time. I will turn the call back over to the presenters.

So I'm just going to close with a thank you for everybody for being with us and participating in our first year. We close out our first year as a public Company, I'm very pleased with our performance. I'm pleased that we've been able to raise our guidance, and I'm pleased with the performance of the Company. And I just want to reiterate what I said earlier about -- thank you to the entire Teladoc team and our clients for joining us on this journey. With that, I'll close the call.

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