Teladoc Health Inc (TDOC) 2017 Q2 法說會逐字稿

Welcome to Teladoc's Second Quarter 2017 Earnings Conference Call and Webcast.

(Operator Instructions)

It is now my pleasure to turn the floor over to Adam Vandervoort, Chief Legal Officer.

You may begin.

Thank you, and good afternoon, everyone.

We look forward to discussing our second quarter 2017 results with you today.

Joining me for Teladoc's conference call are Jason Gorevic, our President and Chief Executive Officer; and Mark Hirschhorn, our Chief Operating Officer and Chief Financial Officer.

Today, after the market closed, we issued a press release announcing our second quarter 2017 results and filed our Form 10-Q.

The release and filing are available in the Investor Relations section of teladoc.com.

As a reminder, 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.

We'll start today's call with brief prepared remarks, followed by Q&A.

Today's call will also contain certain non-GAAP financial measures, which we believe are important in evaluating our performance.

For more details on these measures, the most comparable GAAP measures and for a reconciliation of the 2, please refer to the press release posted on teladoc.com.

I now turn the call over to Jason.

Thanks, Adam, and good afternoon, everyone.

I'm pleased to report that Teladoc continued to deliver very strong results in the second quarter, meeting or exceeding our guidance on nearly all key metrics.

On the heels of back-to-back strong quarters and excellent progress toward many of our business initiatives, I am very confident in Teladoc's ability to achieve our full year financial objectives.

Building upon our performance in the first half of 2017, the recent acquisition of Best Doctors makes me even more optimistic than ever that Teladoc is poised to truly transform how people access healthcare.

We continue to receive enthusiastic market reaction to the combined Teladoc and Best Doctors product offering.

In the second quarter, we met or exceeded our guidance ranges across each of our key metrics in which we recorded total revenue of nearly $45 million or growth of approximately 68%; adjusted EBITDA loss of $5.1 million, which improved from approximately $10.5 million in the same period last year; membership of 20.5 million lives or growth of 33% over the prior year and over 2.9 million newly added lives since year-end; and finally, visit volume of approximately 309,000 or growth of 55%.

This represents a quarterly annualized utilization rate of approximately 6.1% or an 84 basis point increase year-over-year, reflecting the increased adoption rates by our members, resulting from the high impact of our member engagement strategies.

Turning to an update on new business.

We have over 0.5 million new members going live over the remaining months of 2017 within our Aetna and UnitedHealthcare books of business, in addition to tens of thousands of additional members within existing clients like Amazon, who will benefit from the successful upselling of our behavioral health services.

The continued strong demand for our virtual care delivery solutions resulted in Teladoc welcoming Microsoft's 180,000 members to close out Q2.

I'd also like to highlight our continued success in the provider market, where our solutions now support more than 160 hospitals across the nation as well as other provider-owned entities.

We are proud to announce new client wins, which include Adventist Health, comprising 19 hospitals across the Western United States; Washington health system in Western Pennsylvania; and CareMount, the largest independent multi-specialty group in New York state.

Increasing our client roster reflects the strength of our solutions versus our competitors, in addition to the tremendous flexibility of our solution for the hospital market.

Teladoc's vision is to help providers build healthier communities and improve patient outcomes, which is clearly resonating with clients.

And I'm very pleased that we've been able to work with existing constituents in the market to improve the overall healthcare delivery system.

We were also pleased by the contributions from our behavioral health offering in which revenue more than doubled year-over-year to reach approximately $6.9 million in the second quarter.

We fully expect to maintain this growth trajectory throughout 2017.

Now I'd like to address the company's tremendous opportunities that come with the completion of the Best Doctors merger.

As you all know, we successfully closed the Best Doctors transaction on July 14, ahead of the schedule that we laid out in our initial announcement.

Since then, we've been hard at work, sharing our future vision with our clients and partners, planning for the integration of the 2 companies and identifying and prioritizing the many changeable growth opportunities in both the short and longer term.

First, I'd like to share our evolving vision for Teladoc given the strong capabilities that Best Doctors brings to the organization.

With clinical capabilities that span the entire healthcare continuum, Teladoc will soon represent the first stop for many consumers around the world looking to resolve their healthcare issues in the most efficient, high-quality and cost-effective manner.

Regardless of their need, ranging from coughs to cardiac conditions, Teladoc will have the ability to help solve their concerns.

By providing a single interface and intelligent guidance through the full spectrum of clinical capabilities, tools, information and guidance in the Teladoc portfolio, we will transform how the consumer accesses the healthcare system, providing greater convenience, better outcomes and unmatched value.

This vision clearly resonates with our clients, members and partners.

I've been through many acquisitions, but I've never had clients so immediately excited and so quick to grasp the potential opportunities created by combining 2 organizations.

They literally can't wait for us to deliver the fully integrated offering, and they're telling us that this is a game changer.

Next, I'd like to give a brief update on the integration of the 2 companies.

I'm incredibly pleased with the progress that we've made in a very short time.

In July, we held a leadership meeting that brought together the top 60 people from the combined organization for 2 days with a focus on aligning around a common vision and set of priorities and tackling some of the large cross-functional integration efforts.

The session was amazingly productive with all participants energized around realizing our potential.

We have a strong road map for a multiphase implementation of an integrated approach to operational product and go-to-market strategies that focuses on achieving a greater vision while capturing near-term growth opportunities such as those presented by cross-selling the Best Doctors products to the small employer and health plan markets where Teladoc already has a very strong footprint.

Lastly, I want to highlight how I've been struck by the similarity of the Best Doctors and Teladoc management cultures.

Again, I have never seen an integration effort in which all participants were so collaborative from day 1, and I think it's a testament to the maturity and mission orientation of the 2 management teams.

Both organizations truly believe we have the opportunity to make an enormous impact on the healthcare system and transform how people get care.

And the common culture flows from that goal.

Before I turn the call over to Mark, I'd like to provide an update on the legal and regulatory front.

Texas Bill 1107, having passed both House and the Senate unanimously, was signed into law by Governor Abbott on May 27.

The new law makes it clear that a patient-physician relationship may be established using telemedicine and brings to a close our 6-year legal fight with the Texas Medical Board.

We are extremely proud of all of our employees and the numerous constituents that we worked with to enact this new law.

Teladoc spearheaded the effort to provide the people of Texas with a clear and legal path to quality, affordable and accessible healthcare.

We also continued to see great progress across the nation.

New Jersey, Illinois, Minnesota, Arizona, Montana and other states recently enacted telehealth-friendly legislation.

As you can see, we have a lot of exciting things going on right now at Teladoc.

I'm very pleased with the results we delivered in the second quarter, and I have every reason to believe that we are on track to reach our year-end objectives, where we continue to target the fourth quarter to achieve positive adjusted EBITDA.

We will continue to execute on our growth strategy of extending our industry leadership and successfully cross sell new and innovative solutions such as the Best Doctors portfolio of services to existing members and prospects.

Having just completed the most exciting quarter in the company's history, one marked with record financial performance, a historic piece of legislation, and the company's most significant acquisition and the strengthening of our balance sheet, the public profile of Teladoc is getting stronger every quarter.

I have never been more optimistic about the opportunity ahead of us.

And as we celebrate Teladoc's 15-year anniversary, I am proud of our employees who continue to keep our promises to our members, our clients and our investors.

With that, I'll turn the call over to Mark to review our second quarter results in greater detail.

Thanks, Jason, and good afternoon, everyone.

We will start with revenue where we recorded $44.6 million, representing 68% growth over the prior period.

Organic revenue growth was approximately 50% over the same period last year.

Subscription access fees accounted for $37.5 million or 84% of our total revenue and grew over 74% year-over-year, reflecting overall membership expansion and significant contributions from the growth in direct-to-consumer behavioral health services.

Consistent with the past several quarters' trend, we continued to experience strong growth from our health plan partners, our DTC offerings and continued expansion in our core distribution channels, targeting small to midsized employers who embrace bundled visits-included contracts with higher PEPM rates.

Our average per employee per month fee, or our PEPM, across our business was $0.61 compared to $0.47 in the prior year period, a 30% year-over-year increase reflecting the positive impact from the increased visits-included subscription mix I just noted.

Subscription access fees grew 9% sequentially from Q1 of this year.

Our visit fee revenue for the quarter grew 44% year-over-year to $7.1 million.

100% of this growth is organic.

Turning to total visits.

We completed approximately 309,000 visits in the quarter or growth of 55%.

As we always expect visit times to peak in the first and fourth quarters, we were pleased with our second quarter volume.

This equates to a quarterly annualized utilization rate of 6.1% and an 84 basis point increase over the same period in 2016.

I would like to spend a minute or 2 on the very positive trends developing within our gross margins.

Over the past 2 years, we have launched new versions of our mobile apps, in addition to several significant enhancements.

These innovations have generated far greater member interest in Teladoc, and in particular, has resulted in a meaningful shift from telephonic visit requests to mobile requests.

This behavior change, in addition to the revenue mix of 84% subscription-based revenue, helped Teladoc generate stronger margins as our cost of service declines when our members leverage our technology.

Our gross margin for the quarter was 77.5%, the strongest quarter ever recorded by the company and an increase from the 74% we recorded a year ago.

Our total operating expenses in the first quarter were $46 million, which increased 43% over the prior year.

Sequentially, operating expenses increased by approximately $3 million with much of that increase in absolute dollar terms attributable to acquisition-related cost and stock compensation costs.

Other modest increases were seen in sales and technology to support our 68% revenue growth.

As we have throughout the past several years, we will continue to invest in our infrastructure with a focus on value creation and scale.

We intend to harmonize our 3 member service locations in Lewisville, Texas; Phoenix, Arizona; and Boston.

We will better serve our members with fully redundant cross-trained colleagues that can assist members with all aspects of our service offerings.

While we have recently launched several multidisciplinary integration efforts, we are creating a few exciting operating models that will inevitably benefit members and shareholders alike.

The company's adjusted EBITDA improved to a loss of $5.1 million compared to a loss of $10.5 million in the same period last year.

We were very pleased with our progression towards positive adjusted EBITDA for the fourth quarter of this year.

Our net loss in the quarter was $15.4 million compared to $14.9 million in the same period last year.

Net loss per share was $0.28 compared to a net loss of $0.38 in the same period last year, reflecting our higher share count in the current period.

Our weighted average common shares outstanding were 54.6 million shares in this period compared to 38.7 million shares in the same period last year, reflecting the issuance of 7.9 million shares from our follow-on offering in January of this year, in addition to the 7 million shares issued for the acquisition of HealthiestYou in July of 2016.

Turning to our balance sheet.

We ended the quarter with over $400 million in cash and short-term investments, reflecting the proceeds from our $275 million convertible offering this past June.

Our financial statements reflect debt of approximately $200 million, net of the debt issuance costs of $12 million from our convertible notes, reflecting the classification of approximately $62 million that represents the computed equity component of the notes.

This amount will be amortized over the 5.5-year life of the debt.

The weighted average cost of our debt is now approximately 5% annually.

Our Silicon Valley bank debt balance remained constant at $42.4 million.

However, in July, in connection with the closing of our $175 million senior secured debt, we used a portion of our new debt facilities to pay off the entire SVB bank debt.

Pro forma for the effect of the debt issuances and the acquisition of Best Doctors and after paying all of the respective transaction fees, the company had more than $150 million of cash at June 30 of this year.

We believe our strength and capital position affords us tremendous flexibility to manage the business requirements for the next several years.

Now I would like to provide our outlook for the third quarter of this year, which includes the results of Best Doctors from July 14, the date we closed on the acquisition.

We now expect total revenue between $67 million and $68 million for the quarter, EBITDA loss between $16 million and $17 million, adjusted EBITDA loss between $2 million and $3 million and total membership of approximately 22 million to 22.5 million members.

Total visits should come in between 275,000 and 300,000 visits.

And net loss per share, based on 56.5 million weighted average shares outstanding, is expected to range from $0.56 to $0.58.

For the full year 2017, we now expect total revenue between $230 million and $235 million and EBITDA loss between $46 million and $48 million and adjusted EBITDA loss between $15 million and $17 million in which we expect to achieve adjusted EBITDA positive results in the fourth quarter of this year; total membership of approximately 22.5 million to 23 million members; total visits between 1.4 million and 1.45 million visits; and a net loss per share, based on 55.1 million weighted average shares outstanding, is expected to range from a loss of $1.52 to a loss of $1.55 per share.

Finally, I wanted to mention that we'll be hosting an Analyst Day in New York in mid-November.

We'll use this day as an opportunity to do a deeper dive into the combined Teladoc and Best Doctor businesses, as well as to give you a chance to get to know a number of our senior leaders.

We are finalizing the exact date, and we'll provide more details later in the summer.

And with that, operator, please open the call for question.

(Operator Instructions) Your first question comes from the line of Sean Wieland with Piper Jaffray.

Congrats on getting the transaction done.

My question is on -- if you can just help us out with how you're going to fold the Best Doctors acquisition into the model.

You gave us the numbers.

But specifically, I think that the membership number that you guided to, is that inclusive now of the Best Doctors acquisition?

Are you going to wrap the Best Doctors visits in -- so first off, on an operating metrics perspective and then on the financial basis, like interest expense, that kind of thing going forward?

Sure.

Thanks, Sean.

It's Mark.

We will end up incorporating the Best Doctors metrics for membership in the U.S. that is similarly defined to our membership today when every 1 of our 20-plus million members is a paying member, right?

Either a health plan or an employer is paying Teladoc for access to our services.

For membership in the United States, for employer membership that Best Doctors had, we're going to be adding that membership.

However, for membership that comes through health plans as well as international membership, we'll be providing for that dollar breakout, but we will not be including those individuals that are covered in our total membership number.

So you'll have domestic and you'll have international as well as some U.S. health plan and workers' comp revenues.

But that will not be included in the actual membership number.

Okay.

The same go for visits, too?

Visits will also be broken out, correct.

Okay.

And then going down to interest expense and acquisition-related expenses built into your guidance for Q3?

Yes.

That's all built into the guidance, and that's all been consolidated under the one entity.

All of those costs, both interest elimination of other costs and new cost for issuances of stock compensation and the like is all covered in the guidance for the remaining part of the year.

Can you tell us what we should...

We'll be laying out the complete format, Sean, in November at the Analyst Day.

Okay.

And then just one.

Jason, you mentioned the A word and media reports out that Amazon wants to get into this business.

I know they're a customer of yours per your comments, but what are your thoughts on that?

Yes.

So exactly.

I talked about them as a customer, not as a competitor.

So look, I would say -- I would start by saying they're not the first large, technology-oriented company to potentially be interested or express interest in this space.

As you know, Google tried to enter this area.

Verizon tried to enter this area is as -- I think we've demonstrated, not as easy as it looks.

I would say that while I would expect them to get into areas where they have clear capabilities to leverage their logistics and distribution capabilities, for example, with a pharmaceutical distribution and/or medical supply distribution, the remote delivery of care, building doctor networks, dealing with the 50-state regulatory environment is pretty far afield from what they do.

So I'm not -- honestly, I just don't lose sleep about them as a competitor.

And even if they do decide to get into this space, it's going to be many years before they have any real footprint.

So I just -- again, I don't consider that to be a significant threat.

Your next question comes from the line of Lisa Gill with JP Morgan.

First, I want to congratulate you not only on the quarter but, Mark, I will be happy -- Jason and Mark, happy to never talk about the Texas Medical Board again with an investor.

So happy that we're just moving forward from that.

But, Jason, if we could just maybe start with the 2018 selling season.

My guess would be you're probably right in the heart of it right now with both your health plan relationships as well as with employers.

Can you maybe just give us any highlights and the early parts as we start to think about 2018?

Yes.

Lisa, thanks again for the congrats on Texas.

We couldn't be more happy.

So I would say we're in the middle, as you say, of a very strong selling season.

Across all of our market segments, we're seeing really good receptivity to our whole portfolio of products.

And in fact, the announcement of the Best Doctors acquisition has improved a lot of the discussions that were sort of mid-cycle as clients start to see the possibility of what we can bring them in the future in an integrated model.

The other thing I think I would say is that we're seeing more very large opportunities during this selling season than we've seen in previous selling seasons.

So of course, I'm happy that we're seeing strength from the small group market, all the way up to the health plan market.

But the defining characteristic of where we are in this pipeline versus the same one last year is more large opportunities.

And when you say large opportunities, are you talking specifically larger employer opportunities or larger health plan?

I mean, is there one segment that you see as more prevalent right now than the other?

It is really across -- well, obviously, not in the small group market.

But across both health plans and employers, we're seeing more very large opportunities.

And then, Jason, if I could just understand one comment that you made around Amazon.

I understand that you have a relationship with them, and you're their telehealth provider.

But in following your company now for the last several years, it's really getting people to know and understand what telehealth is and the benefit that's out there.

Do you see a potential opportunity to maybe partner with Amazon?

I mean, I think almost everyone visits Amazon at some point in their day.

So could you see a potential opportunity there where you're almost like a reseller where they push it back out to Teladoc?

Absolutely.

I think we're more likely a -- they are more likely a distribution channel for us than they are a direct competitor.

Your next question comes from the line of Sandy Draper with SunTrust.

I'll add my congrats on getting the transaction done and a solid quarter.

A couple of questions.

Mark, can you just remind me, first, in terms of the mix of the revenue model U.S. versus international?

I know it's different.

I'm just trying to remember which one is PMPM and which one is the other.

Just trying to think about, sort of following up on Sean's question about how the revenue is going to flow in.

Yes.

So overall, Sandy, we're going to expect about 15% of our consolidated revenues to come from international, ex U.S. We've got -- again, the per member per month fees from our enterprise, our commercial clients, the employer clients in the U.S. is going to be laid out separate and distinct from the non-U.

S. clients.

Generally or I'd say the majority of all of the non-U.

S. revenue is coming from large insurers and financial institutions that are providing the Best Doctors benefit to their membership.

It is, quite frankly, very different in its composition to any employer-type contracts that both the Best Doctors entity and Teladoc have entered into in the U.S.

Okay, great.

That's helpful.

And then the next question is sort of a -- the opposite end of the spectrum from the Big A. One of your competitors on the pure telehealth side looks like sort of trying to make some waves, and Texas is offering a $10 special for telehealth.

I know that's more of a B2C model.

But is there any thought about need to respond or anybody trying to go after price as a way to attract business?

Absolutely not.

We would never chase price like that.

We don't think we need to, that we know that that's not sustainable.

It's -- if I had to analyze it, I would probably say that they feel like they're not going to have to give away too many visits since they launched the promotion for a limited amount of time in the middle of -- at the beginning August, right?

Not exactly peak season.

So I think that that's something that will be a press release, and we'll never hear about it again.

Got it.

That makes sense.

And then the final question.

And I still don't know how to quite characterize it.

But to me, pretty clearly, you guys are moving beyond just being a basic telehealth provider and to be broader sort of healthcare cost-containment better practice for employers who manage health plans.

That's a mouthful.

But I'm just trying to think, without trying to give your cards away, are there certain walls you're not willing to cross?

I would assume you don't want to go into bricks and mortar.

But clearly, with the 2 recent acquisitions, you're moving beyond just delivering -- being a basic telehealth provider.

So I'm curious, Jason, if you have thoughts about, okay, these are barriers that we're not going to cross.

But beyond that, we're willing to think outside the box.

Yes.

Thanks, Sandy.

So you're exactly right.

We have no intention of getting into brick-and-mortar care.

We do believe that it's important for us to be able to resolve the consumer's issues.

For us, we're not just simply an information provider.

We want to help the consumer resolve their issues.

We may go into things that increase the stickiness and the frequency of interaction with our app or with our services, so that we can funnel someone to a more active interaction when it's appropriate.

And I think you'll see us develop new services that leverage the respective capabilities of Best Doctors with their sort of high-end specialty care and Teladoc's volume transaction processing and services.

So that could look like things around chronic care management, post-discharge adherence and follow-up visits for the hospital systems, things like that.

So it's a long answer to, I think, a good question.

But I think it gives you a little more of the direction of where we're going.

And again, as Mark said, we'll try to provide some more details about the longer-term vision when we host the Analyst Day in November.

Your next question comes from the line of Jamie Stockton with Wells Fargo.

I guess maybe the first one, Mark, just to save you guys a bunch of questions offline.

What's the explicit Best Doctors contribution that's in guidance, I guess maybe for revenue and the member number?

Sure.

So the member number is under 1 million members.

Again, this is just U.S. employee membership.

For revenue, for Best Doctors, we've guided between $20 million and $26 million for quarters 3 and quarters 4. For quarter 3, we have the full quarter, except for the first 2 weeks of July, as we closed on July 14.

So we've got somewhere in the range of about $22 million.

And then in Q4, we're also in the range of about $25 million, $26 million.

Okay.

That's great.

And then you called out the very strong gross margin during the quarter and how you're saying a lot more requests come in via the app, which makes me wonder whether we're getting any closer to the day when you guys can pull back on the advertising and marketing spend to drive awareness and somehow drive more awareness through the app.

If you can get it on people's phones, if you have to send them something in the mail to make them aware that they've got the benefit, stuff like that.

I know this got talked on about a little bit on the call last quarter.

But just any updated thoughts on what's going on there and whether or not we're any closer to an inflection where awareness could be driven at a much lower cost?

I think you're starting to see that, Jamie.

If you look at the mix of our marketing spend, it is -- it has shifted over the course of this year versus last year to much more digital and much less direct mail.

So we still are in a place where we have to do consumer engagement, but our consumer engagement is shifting to electronic.

And that's part of what's driving the higher use of the app because, of course, when we market digitally, we're not marketing -- well, we're marketing people to move to digital channels to interact with us.

So I think we're seeing the benefit of that, and we get higher yield from that because it's both lower cost and more targeted.

Okay.

Maybe one more question, Jason.

Just your thoughts on -- I saw this Medicare Telehealth Parity Act of 2017, which looked like a reasonable plan for getting Medicare to fully reimburse for telehealth over a number of years.

Are we any closer on that front to a fix?

Or is there just some good ideas on the board but not the kind of momentum in D.C. that you would like to see yet?

I think I would call it a long, gradual march.

We continue to see positive steps, sort of one bill at a time that chip away at the barriers to larger-scale telehealth adoption and reimbursement, but I haven't yet seen a silver bullet come through in something that I think is going to change the game overnight.

So I'm optimistic that we continue to move in the right direction.

And of course, all the states that we mentioned that have passed positive telehealth legislation are a good indicator of that, but I don't see anything that I'd look at today that I think is going to create a sea change.

Your next question comes from the line of Ryan Daniels with William Blair.

Yes.

A couple of follow-up here.

First, in regards to, Jason, the larger opportunities, both among employers and health plans, is that due to greenfield opportunities opening up for different providers that either were not early adopters or wanted the legislative landscape to improve?

Or is it more a function of potential market share shifts with those entities not happy with their current vendor?

The answer is both, Ryan.

We're seeing large opportunities, both from organizations who have not yet adopted telehealth as well as those who have adopted and been dissatisfied with what they're getting from another player.

Okay.

That's helpful.

And then you talked about kind of the future of the organization and this integrated model across the care continuum is generating a lot of interest in the customer base.

I'm curious if that's something that you can promise this selling season for a 1/1/2018 start.

Or is this something that is going to take longer, so we probably won't see the benefit of that integrated model manifesting in the numbers till later in the year or 2019?

So we will deliver for our common customers, meaning those who have both Best Doctors and Teladoc historically, a combined interface, an integrated interface where the consumer can interact for both sets of products in a -- through a single app, through a single web interface and through a single call center.

That will be available for January 1. Having said that, I think the more full vision for the consumer coming to us with a broad array of healthcare needs and Teladoc acting as their guide to our wide array of products and services won't come online in its full form until sometime in the middle of 2018.

So progress and meaningful value generate first, but realizing the fuller vision, middle of '18.

Okay.

That's helpful.

And then a final one for Mark as I know will get asked, just in regards to the guidance.

I know the old membership guidance was 21.5 million to 23 million.

I think it's now 22.5 million to 23 million.

So is there any nuance at the higher end where you're not taking that up despite Best Doctors coming in with over 1 million members?

No.

Ryan, the one metric where I think we didn't exceed the top end of the scale was in membership, and that it started off somewhat lower in Q1.

Even though we continue to generate the strength on the top line of revenue, it's coming in with a mixture of both the smaller and midsized clients paying that far higher per member per month as well as the contribution from our behavioral side.

So the -- I think the gap in the membership will begin to narrow that down as we continue to work through what we believe is going to come on throughout the next 2 quarters.

But we'll refine that a little bit more, especially when we provide for year-end guidance after Q3 and then when we look into '18.

But it is getting somewhat more -- there's a little bit more of a contribution from the behavioral side, which, as you know, with about 15,000 existing subscribers paying somewhere around $200 a month.

The impact there is significant, but the requirement to roll a model up from purely a subscriber base is no longer 100% accurate.

Okay.

So put simply, the revenue outlook is largely unchanged or unchanged for the core business, but the composition of that revenue is just a little different.

That's precisely right.

Your next question comes from the line of Mohan Naidu with Oppenheimer.

Jason, maybe a quick one around the [competitive] landscape.

What do you think about potential implications of EHR companies trying to open up telehealth platforms and trying to increase physicians to do telehealth, one of their own physicians?

What are the barriers there to deal with?

We're seeing very, very strong momentum in the provider market.

We are -- our close rates are probably right now highest in that market.

And what is dramatically different is a pure technology solution that enables someone to interact between a member and a physician or patient or physician is a small portion of the total solution that we offer to our provider, and that is very, very evident as we go through the sales process and the client needs exploration with our hospital systems.

And we see many, many times that the providers are considering an option that's offered by their EMR vendor, and it falls well short of our solution.

So at this point, that is not a meaningful threat.

Obviously, we continue to monitor that, but we are very successful right now with respect to the provider market.

Okay.

And in those contracts, is it typical for providers to have at least the first pass or trying to do their own visits for regular hours or something like that before it falls into your network?

I would say most of our providers have some portion of their network being used, but I would say 80% to 90% of the provider contracts have us providing some level of either first-tier or second-tier provider network service.

That's great.

Any quick update on Aetna's contract?

I think the renewal is coming up pretty soon.

Any early discussions around that?

Yes.

We're right at the tail end of that, and we'll provide an update on the next quarterly call.

I would expect that we'll be able to give you a definitive update.

And just to allay any concerns, all very positive.

I have 0 concerns around that renewal.

Your next question comes from the line of Richard Close with Canaccord Genuity.

I wonder if you could just comment on the utilization rates and your thoughts in terms of the improvement that you've made there and expectations as we head in the second half of the year.

Yes, absolutely.

I'm glad you asked.

I'm really pleased with our utilization rates in the quarter, and we talked about what the annualized utilization rate in the quarter is and how it compares to last year.

Just to give a little bit more context.

If you annualize the first half utilization rate, it's about 6.9% annualized utilization, which is up 110 basis points over last year's same period, so very, very strong progress there.

And as I said earlier, I think a lot of that is due to the greater sophistication in our digital consumer engagement strategies.

We are really seeing the benefit of highly targeted communications, multichannel marketing using digital channels, ranging from search to social and everything in between.

And then layering on top of that very targeted direct mail campaigns that continue to build awareness.

So we're really pleased with how that's progressing, and we have multiple examples within the company where we've targeted specific populations where we thought we had opportunity to increase utilization, and we've seen the direct results of that.

And then with respect to how you're looking at the second half, would it be like similar improvements in terms of 100-plus basis points as you look in third and fourth quarter?

Or do you expect that to moderate some or accelerate?

Yes.

We expect that to accelerate, Richard.

We obviously have a plan to accelerate spend to generate additional utilization at certain clients.

And then overall, we are very confident that the third and fourth quarter will replicate those of the second half of each of the respective years that we've been witnessing and investing in this accelerated utilization.

Q1's utilization was very strong, and we'd expect to see an improvement, obviously, in this fourth quarter, where we're projecting, obviously, tremendous increase in visits, and that will be coming from existing clients.

Okay.

Jason, you talked, I think, last conference call about new service areas.

I don't remember you bringing that up on this call.

Maybe your efforts have changed a little bit with the Best Doctors acquisition and integration there.

But maybe if you could update us with respect to any new service areas you guys are looking at and an update from the first quarter.

Sure.

So first, I would say that the newer lines of business that we rolled out, dermatology, behavioral health, sexual health, tobacco cessation, are seeing good penetration in our existing book of business.

So we continue to see growth among those different product lines.

And then as we now look to integrate Best Doctors, our priority is in doing that and creating this fully integrated suite of products and services all through a single interface in a very intuitive user experience.

And we're going to focus our efforts primarily on that over the course of the next 6 to 12 months before we then look to launch additional clinical services.

I do think, as I said earlier, it's likely that our next set of capabilities will come around, more chronic care management and probably post-discharge follow-up care for the hospital market.

Your next question comes from the line of Charles Rhyee with Cowen.

Yes.

Mark or Jason, I think I might have missed it before.

You talked about we are seeing a shift sort of away from the telephonic visits more to mobile.

I might have missed it.

Did you give a -- have you given us a breakdown of what the mix of business were between mobile video versus telephone and desktop?

We didn't give the breakdown.

But the breakdown for the second quarter was -- let me see where we were.

We had 55%-- we had about 55% of our visits were requested through the mobile app.

Or the website.

Or the website.

Digital.

Through digital.

And that's the first quarter that we've had a more -- that we've been over 50% through digital channels versus through the phone.

Yes.

So I mean, that's interesting.

And so when we think about the margin profile then, can you give us maybe some directional between sort of what the gross margins on sort of a telephone visit are for you?

Just given what the cost for a call center is?

Support, et cetera, versus the digital, so we can get a sense on -- as we think about this mix shifting, how margins could trend?

Yes.

Well, again, we started seeing some of that reflected in this past Q2.

That's helped to bring our margins to a level that's higher than even we predicted as a result of this trend.

I think we've spoken in the past that we see anywhere between 5% and 10% increase in the delivery of the visit.

So on a unit economics basis, it's becoming far more profitable to use and to leverage the digital assets in order to initiate the visit.

Clearly, there are a number of clients that still rely heavily on the phone, but we don't expect that 55% to grow very rapidly over the next several years.

We expect it to continue to climb.

And obviously, our service delivery in other areas as well is benefiting from scale, so we'll continue to see increasing margins on the unit economics side.

Okay.

That's helpful.

And just to follow up, Jason, at the beginning, you were talking about with Best Doctors that you're envisioning sort of Teladoc as this first stop as patients sort of enter the healthcare system.

Can you talk about how you envision then?

How does then Teladoc also integrate into that patient's -- their physical healthcare ecosystem, so their other doctors, their other healthcare providers?

How should we start thinking about that kind of integration into the broader healthcare system?

Yes.

Absolutely, Charles.

So more and more, we're seeing opportunities for us to integrate across their healthcare delivery channels.

Obviously, with their health plans, we do that quite a bit, and that enables us to bring in quite a bit of clinical data.

We're now grabbing medication history through Surescripts in order to understand what medications they've been on, obviously looking for any interactions that might be the case but also understanding history, dosage and the complexity of what they're dealing with on a daily basis.

The Best Doctors acquisition, of course, gives us a platform which is built to collect medical records, right?

They do that as a matter of course as part of doing an expert's second opinion.

And more and more, we're working with providers across the country.

So we very rapidly become a place where we view ourselves as being part of that healthcare ecosystem and sort of a digital or virtual channel into it.

In many cases, we're going to be the ones delivering the care.

But in some cases, we're going to be able to help facilitate it delivered by someone else, either in a virtual manner or helping to get somebody to a physical site.

So -- and that plays out as we do research with consumers and our partners and clients.

There is a lot of enthusiasm around that vision.

Great.

And maybe just one last follow-up.

How is the provider part of the business going, I might have missed it if you have made mention of it, in terms of your move into the provider market?

Yes.

The provider market is going extremely well for us.

Our platform-as-a-service offering resonates with clients.

It's very flexible to be able to meet their needs.

It is clearly differentiated based on leveraging our operational capability as well as our consumer engagement capabilities.

Our clients are very, very impressed with our quality initiatives and are asking us to help them with their telehealth quality, quality management programs.

So -- and I think I said earlier, it's probably the segment in which we see the highest close ratio, just based on the value proposition that we have there.

Your next question comes from Matt Hewitt with Craig-Hallum Capital.

Just a couple of questions for me, following up a little bit on the gross margin, obviously.

And you've talked about this a lot but strong uptick.

You're talking about some of the drivers to that uptick.

But as we think about the next couple of quarters, you're going to have, I think, a little bit of an offset with the BD, or Best Doctors coming onboard.

How quickly do you anticipate being able to get that back up to Q2's level?

Are there some immediate levers now that you've closed the transaction that you can implement to help Best Doctors gross margin?

Yes, yes.

The Best Doctors gross margin was within striking distance of the traditional or historical Teladoc gross margin.

There's already been some synergies identified as we're working on the integration of the operations, finance and HR departments.

First and foremost, those are things that will get completed prior to the end of this year, and more of the commercial-facing aspects of the company will have full integration throughout '18.

But we've identified service delivery as well as a number of other things that will enable us, even starting at the top with the pricing, that will enable us to ensure that the margin profile overall is far closer to Teladoc's historical profile.

Okay, great.

And then one more balance sheet item, and I'm sorry if I missed this earlier.

But can we get a current balance sheet, cash, debt?

And then how much is left or how much [you think] about sending in a convert?

Sure.

So we have a little over $150 million in cash as of June 30.

And if you pro forma the debt, a full $450 million on the balance sheet.

It will be represented as slightly less than that because of the equity-linked component on the convert.

There's about $62 million that came off the face value of that $275 million issuance.

But you should think of that as $450 million of debt with a carrying cost of about 5%.

And again, that equity component, that $62 million is going to be amortized over a 5.5-year life of that convert.

You asked debt, cash?

Yes.

No.

That was it.

That answers the question.

Your next question comes from Matt Gillmor with Robert W. Baird.

I just had 2 clarifications.

So the first one, and I wanted to ask about the Best Doctors membership and how that folds in.

I wasn't quite following Mark's comments.

But does the membership guidance you're providing for the third quarter of 22 million to 22.5 million, does that include the U.S. Best Doctors members?

Or you -- is that just Teladoc on a stand-alone basis and you're saying that the U.S. portion of Best Doctors will be broken out separately in the future?

So that includes the U.S. portion of Best Doctors.

And in conjunction with the year-end numbers and what we're going to profile at Analyst Day, we're going to ensure that the definition of a member continues to be represented with employer and health plan lives where individuals are identified as paying members on a per member per month or per employee per month basis.

External to the U.S., significantly all of that revenue is coming from financial and insurance companies where membership is not a true indicator nor a metric that we're going to include to align with what we have in the U.S.

Okay, got it.

And then following up on some of Jason's comments.

You mentioned that larger organizations are in the market during the selling season.

Do you have any view of sort of what's causing those organizations to look to telehealth just as a buy-in in terms of the value prop or something more specific driving that activity?

Yes.

I would say it's a few things.

One is the maturation of the market.

Two, they're really seeing the success that we've had in driving value for other players.

And then three, as I said earlier, some of the opportunities we're seeing are clients who went in another direction with another player the first time around but aren't -- believe in the opportunity but aren't getting the value from their incumbent, and they're looking for us to provide that value.

So it's a combination of things.

But I think part of it is our consistent demonstration of growth, success and the value that we provide for our clients.

Your next question comes from Donald Hooker with KeyBanc.

Great.

Just for my understanding, the sharp increase in PMPM subscription fees year-over-year was very notable.

I assume a lot of that's mix, right?

From the HealthiestYou, if I understand correctly?

Yes.

You should think about that -- 50% of that is being generated from mix, which is exactly right, selling more to those higher per employee per month small and medium-size businesses.

And the other contribution is really coming from our increase in the top line of our behavioral revenues.

Okay, got you.

And then the other sort of a side question since the call has been going on for a while, just as one last one, bigger picture question.

Always curious about the relationship that Best Doctors had with IBM Watson and using artificial intelligence around sort of some of these patient visits.

I mean, where are we with that?

Are we still really early with that?

Can you provide maybe kind of an update on that?

And how you think about artificial intelligence in your business?

Yes.

It's a good question.

We're really excited about that relationship and about the opportunity for that product.

That product is specifically designed to comb through the literature, which there is more and more literature being published every day than any specialist could possibly keep up with and apply the data from the literature and the learnings from the literature plus the full registry of clinical trials against an individual patient's unique situation and help to get to, a, a better diagnosis; b, a better treatment plan; and c, if there's a clinical trial available matched to that clinical trial.

And so yes, we're early days in the development of that product, but the early results have been good.

And we see a lot of interest from both existing clients as well as prospects in that new product.

And just to be clear, that's used regularly now.

I mean, I know the product is new.

But the plan is to you use that pretty regularly in the Best Doctors business over the next couple of years?

It's a buy-up option.

So in the event that the client wants to purchase the Watson oncology service on top of their Best Doctors product suite or the base service, it's an additional option for them.

Your next question comes from Steven Wardell from Chardan Capital Markets.

Congratulations on getting the deal done.

And I'm wondering is there an opportunity to drive higher engagement at Best Doctors?

And would that be using the same kinds of programs that Teladoc is currently using?

Or would Best Doctors require new kinds of engagement programs because it's a different product?

No.

You're exactly right there.

The unified product, we believe we can leverage our common engagement strategies.

Best Doctors had fairly limited experience with really engaging consumers and hadn't done anything, really, with respect to digital engagement.

They have been focused on direct mail efforts.

We are already launching efforts to some of our common clients to do integrated engagement strategies to measure how much we can move the needle on that engagement.

So we've already kicked that off, and we're very optimistic about that.

Great.

And can you just give us some examples of digital versus non-digital engagement strategies, just to help us (inaudible) in our minds?

Sure.

Through digital channels, we can get a lot of data that helps us to target the consumer based on either their behavior, their search history, content that they've included in their social media profile, search -- sort of regular search information as well as their history.

And that enables us to really do very targeted communications through multiple channels and bring the whole surround sound engagement to life for the consumer.

So we may be in your Facebook feed.

We may be in your Google feed.

We may be in your web-based e-mail, and you are going to think as a targeted member that we advertise all the time.

In fact, we don't advertise sort of all the time and everywhere.

We're just good at targeting where we think we can get the highest yield, and that is driving significantly better results than we've seen before.

Your next question comes from the line of Steve Halper with Cantor Fitzgerald.

Just a housekeeping item.

Implied in your -- what level of amortization-related expense is implied in the guidance for the second half of the year as well as the -- what level of acquisition cost or merger-related costs should we assume?

So, Steve, we're amortizing the $62 million equity component of our debt of the convertible piece.

We also, obviously, have and I would basically direct you to Note 3 on the 10-Q we just filed and Note 9, so the detail will be in there.

And there's a couple of million dollars, obviously, of continued integration costs that we'll break out for people in conjunction with external consultants and other costs that will again be identified outside of adjusted EBITDA.

Okay.

So the amortization related to the acquisition, that will be in the 10-Q?

That's correct.

There are no further questions at this time.

This concludes today's conference call.

You may now disconnect.