Teladoc [SGO 16 – 7 July 2021]

Joining me today to geek out on Teladoc is our in-house stock and tech geek, Thomas Thio. Teladoc’s business model actually revolves around companies and insurance providers rather than a simple pay per use model. They’re still in the early days trying to entrench themselves in an already complicated insurance ecosystem in the US so let’s see what happens here. 

For your reference sake, this episode was recorded on the 7th of July, 2021. Our discussion today is solely for education and entertainment purposes only. It does not serve as any form of advice or recommendations. Thank you for loving what we do and helping us financially to do more for you. Join our Telegram group for further discussions. Let’s geek out!

I’m back in the studio with Thomas to talk about another geekout. Another company that we’ve been wanting to talk about and it’s revolutionizing the way we look at medical… the experience in general of medicine. What is this company we’re going with?

Thomas: This is Teladoc. The ticker is TDOC. As the name sounds like… it’s doing something to do with telehealth, telemedicine. What telemedicine is basically you can provide or give these kinds of care or some kind of healthcare services over the internet. Whether it’s through an app or maybe it’s through a browser, you’ve got a camera, a doctor talking to you and diagnosing what is your problem. If you got a flu, don’t go to hospital. Just take some meds. Stay at home.

Reggie: Stay at home. Take your MC. Tell your boss it’s Covid. 

Thomas: Basically, don’t take up the capacity of the hospital. At the same time… because for TDOC, they primary serve the US market. Geographically wise, US is a bit locked in. To go from place to place, you need a car. But sometimes these patients, they don’t have access to this kind of… I would say cars. Also… don’t have access to the specialized services right around the area. They got to travel really far so this solution helps them to actually get diagnosed. If there’s really an issue, then travel down and just get the treatment straight away. That’s what Teladoc does in a gist. 

Of course, we can go further into the kind of specialized services that they provide. But generally, that’s the kind of use case that they’re trying to solve. 

Reggie: I’m actually pretty amazed that people are okay with Teladoc. Like… just Skype your doctor huh? Going to the doctor felt like an important thing. 

Thomas: But the doctors sometimes don’t want to see you. 

Reggie: Yeah, exactly right? They very sian (bored and tired), they work 30 hour shift. Shout out to all my doctor friends here in Singapore. You guys work very long shift. I totally get that. Things need to change. But yeah. I know that the telehealth space has grown so much because of this whole Covid period and people just adopt… actually pre-telehealth, pre-Covid and the growth of telehealth, there was already a lot of dehospitalization going on. 

A lot of care was going into clinics and health centres. CVS did a very big push for HealthHUB. It’s no longer reliant on hospitals or at least they’re trying to make sure that we’re no longer relying on hospitals and move towards a different kind of process.

Anyway, we are speaking about the US system here, which in itself is very complicated. The whole pharma space in the US is an exciting space. But all that being said, what is the kind of reality that we’re looking at for telehealth? Is it just going to be like a fad that just come and go or what is the growth rate like? What are some things that we should know about this space? It kind of bloomed out of nowhere in my view. 

Thomas: Right, right. I think telemedicine was around for some time, say like six years? But you only see them in very specific use cases or very specific diagnosis because not everything can be done over the web last time. Maybe the internet quality wasn’t so great. The camera wasn’t very high quality. You want to see a rash also problem. All beige… or whatever skin colour and it’s like “oh, I don’t think anything’s wrong with you.” But I’m itching here! “Yeah, sorry I cannot diagnose you. Please come down to the clinic” and things like that. 

You see your insurance provider, in US it’s complex enough that in certain states, you cannot claim for certain things. If you’re based in a place, in a city and then they don’t support coverage for your particular medical condition, that’s it. You have to pay it by yourself. So these things start to open up and certain policies in the US start to become more relaxed. Certain insurance providers also become more comprehensive. 

At the same time, telemedicine also becomes more of a thing. They are accepted both by the patients or citizens, as well as having more doctors on board, specialists on board. You can just pull all of that and really provide the services to almost anyone, everywhere. With more coverage, with more people that is actually using the internet like millennials, and they are used to this. 

Reggie: Everything millennial problem. 

Thomas: All the factors actually pushed towards having this kind of remote care, so to speak. It’s there. I think it will continue to grow. According to some of the research already, it will be here to stay. Certain countries will be more prevalent than others. The US is one of the key movers in that, but in certain areas like Asia… say like Singapore, you will start to see more increased cases like that. It’s just that perhaps culturally… expectation, you demand service so you want to go to a clinic and then make sure that someone is servicing you.

Same thing if you go to NTUC or Sheng Siong, you will never check out yourself. You want someone to tap… 

Reggie: I do. I do. I do. 

Thomas: Thank you for being a responsible person that can take care of your own needs. I would think majority of people don’t think that way, 

Reggie: Cultural shift takes time, which is why Covid expedited a lot of these changes.

Thomas: Yeah. 

Reggie: It pushes a lot of these things forward and Teladoc is one of the leaders in the space and also recently got listed. Recently… a few years, like not some super established company. Could you help us understand more insights about this company specific rather than just the overall space?

Thomas: Sure, sure. I think they are primarily focused on the telemedicine side of things. They heavily do acquisitions to actually complement their existing telemedicine services. They acquired Livongo Health which is like more of wearables and they acquired some other company that does the data aggregation of things, data analytics, and all that.

This is important because they focus primarily on this but they have other stronger partners. Now they acquired… they are already leading these or chiong-ing (moving aggressively towards) these kinds of areas for them. This forms a form of defense against any other competitor who tries to do the same thing as well. 

Very important is that why the wearables? Of course, the person isn’t at the clinic so how do you actually get these measurements? 

Reggie: True. 

Thomas: You need some form of way to actually get these important information of your body, your physique and all that to the doctor or the specialist. If not, it’s like… “measure your heart rate”. I can’t feel. How ah? Then problem, right? Then it’s not standardized. First thing… that’s the thing that they need to go and do. 

Then the next portion is that how can you actually present these kinds of data to financial institutions, insurance so that more of these can come on board? So you form a flywheel. More institutions, more insurance coverage that’s on board, then more users will see that “mmm okay, not bad. I’ll just give it a try.” That reinforces everything as well. More people are actually coming onto the platform because of this cycle rather than just being a generic platform.

Because there’s plenty of other platforms out there that also do telemedicine. China, I think there’s like Good Doctor or something like that. There’s other listed companies in the US also doing the same thing but not in the similar way. Theirs is really acquisition and really focusing on integrating all these companies together and then forming a very comprehensive end to end solution.

So if you need to see your doctor, they make sure that they can diagnose you without even going to the clinic. If they can’t do that, then that’s a separate process of it but you’re still within that ecosystem. They have a network of clinics. They have a network of specialists if you need to go and they will recommend you and all that.

So when you’re enclosed in all that, they can get a piece of the pie. They make their money through the subscription. It could be subscription from the patients, but more likely a subscription from their main customers which is enterprises. They sell this solution as a form of employee benefit. 

Reggie: Really? 

Thomas: Mmm mmm.

Reggie: Okay. 

Thomas: These are their primary customers. About 40% or more of their customers are actually Forbes 500 companies. 

Reggie: Those are very sticky customers. 

Thomas: Yes, yes. And in turn, these employee benefits programs is passed down to the employees to use and it forms a bulk of their user base. So they have that one portion which is all the employees and then another portion which is everyone else who can also tap on this to actually use.

Reggie: Are you telling me that they are the only ones that are really doing this ecosystem play at this moment in time? 

Thomas: They are one of the more successful cases out there. Of course, the closest competitor… let me just search that very quick. It is American Well, AMWL. They are actually one of the more similar… they have more of the similar offerings.

But depending on how you actually look at it, they’re number one in what? Number one in app downloads, but it doesn’t mean that they’re actually winning revenue, that kind of thing. I think the closest competitor that if you want to try to understand this business model would be AMWL.

The main difference is just that… what are you looking at in terms of market share? Number one in terms of app downloads or number one in terms of revenue or the number of customers acquired and all that? Basically, for this analysis of Teladoc, it will be based off the customers. So the Forbes 500… that one is quite shiok (satisfying) when you hear. Like ooh, a sticky customer base. 

Reggie: Yeah. It’s a good place to work with, to work upwards. 

Thomas: Yup. 

Reggie: Okay, okay. I think for a lot of people that don’t understand the US medical system, it’s a very complicated space with a lot of insurance providers in the midst of it and you have all these different kinds of purchases. A lot of middlemen in this game, so if a company can re-envision this whole process and give more value to the employers rather than just paying insurance companies and then just attach themselves straight onto the medical ecosystem, maybe this could be an alternative medical system. I think that’s why companies are interested because you generate more value, bang for the buck and you clean out all these middleman. 

That’s not the discussion for today but for a lot of people that don’t understand why, I think this is a pretty interesting business, not just from the “oh, you can do it digitally”, but because the US medical system is very complicated. There’s a real chance that this can revolutionize the whole way things are done there. Maybe other countries will be just applying certain levels of that. But I think the US is a big monster that can be tackled. Yeah, pretty interesting. Understanding this company, what are some major business models that we need to know or be aware of?

Thomas: I think acquisitions is their primary way to actually grow. They don’t actually do things very organically. If you mean acquisition by organic growth, then yes. But because it’s by the bulk… 

Reggie: Is this a Valeant pharmaceutical…?

Thomas: No, no, no. 

Reggie: For everybody that don’t know, Valeant is this failed M&A (Mergers & Acquisitions) giant that bought a lot of pharmaceutical companies then didn’t really work out at the end because there was not a lot of things to acquire as it goes along.

Thomas: What seems to be happening in US is actually, there’s a lot of consolidation of doctors or specialist clinics. They form their own networks and they just refer amongst each other so that way, they form their own ecosystem. The easiest way to just get as many partners on board is just okay… just one shop acquire. These smaller ecosystem customers… they may not exactly have a great app of their own, but they can just tap on Teladoc and then it’s just more of like data migration, data integration and stuff like that. It seems that the company has done okay with this kind of process. So acquisition and integration is important.

The second thing is really… I think sales at the end of the day and getting… although the customers are sticky, but getting more people on board means that your coverage has to keep increasing. That also means that regulation wise, you’re following these exact rules per state and that’s actually quite complex. 

You have customer data that you need to get, proper records and proper security [indiscernible]. You also need to get all these regulations compliant. Certain obscure things like the person has a certain diagnosis cannot claim in a certain state. Must go to somewhere else.

But you have these kinds of providers that you just wallop, you just take, they might be able to provide it. That is actually important, this kind of synergy that helps them to grow and grow. 

Reggie: Okay, clarity here. Teladoc is doing a platform play. Is that what I’m hearing?

Thomas: Yes. 

Reggie: That means the doctors are not under their payroll. They are not building that infrastructure of the professionals and all that. They’re just doing the platform with the technology and they are essentially matching customers to doctors through their integrated platform. 

Thomas: Mmm mmm. 

Reggie: That’s all it is. 

Thomas: Yup.

Reggie: Okay, so very lean model. 

Thomas: Very lean model. 

Reggie: Okay. 

Thomas: The two main ways they make money is through the subscription. There’s the enterprise one and then of course, there is a small pool which is like self… they subscribed their own. Then the second one is… 

Reggie: Amazing how the self subscribed one is a small pool. 

Thomas: Oh yeah. 

Reggie: It’s cool. They’re very young to get the companies on board at this level. Pretty cool, pretty cool. Continue… 

Thomas: Actually it will make more sense for companies to just buy into Teladoc’s program because they don’t want to handle all these claims processing, the insurance thing… like you can claim for this and that. HR only has limited bandwidth. There’s already so much to do inside the company so if you outsource these things to them, all you need to know is this package, this price. Your employees are happy. That’s all I want to know so that actually makes things very clear.

Then the other way that Teladoc makes money is through visit fees. Think of it like a referral. If the client… the customer actually goes to a clinic. That’s considered a visit fee because they actually went down to see a specialist clinic and they have some diagnosis there. Because you routed this particular person to a specialist clinic which was otherwise not making much money, then you get a fee, like commission. 

This is great because if you just have a clinic on your own, even though you have a network, you are just based off your geography. But in this case, Teladoc helps to decentralize it and say that there’s other options also. Do you know that this particular doctor in your area could also do this? 

Reggie: Decentralized… buzzword. Yes, okay. What I’m hearing is they’re doing subscription. They charge their clients in terms of a month-to-month kind of subscription process. Do they actually pay the GPs when they go on telehealth arrangements. If I’m a client, then I go on Teladoc to talk to a doctor. Does the doctor get paid by Teladoc? 

Thomas: To my knowledge, it depends. There’s different kinds of packages for each of the companies, so it goes based off that and per company, they will have different kinds of insurance packages. Say you have $3000 worth of yearly in-patient… sorry, outpatient fees that you can claim. Yeah, then whichever. That’s really onto the company. 

Reggie: Okay. 

Thomas: But what they do is mainly… I have this network. You subscribe with me with your X number of employees per head. That’s all you have to worry about and all things are covered. Your employees just use our platform, they claim through you. 

Reggie: Okay. 

Thomas: Or they claim through our platform through you. 

Reggie: Okay, so fundamentally, it does not change the ecosystem yet. They’re just building one layer on top of it to manage this whole big giant. 

Thomas: Mmm. 

Reggie: Okay, okay. Pretty cool. Okay. Cool stuff. 

Thomas: I think the last thing is they are really a platform company so you can think of it like a SaaS (Software as a Service) company. They also manage the churn, but because… it’s interesting. It’s like they sell to an enterprise, the churn is very low. It’s not like one year at this company, another year swap out another company for this company. If that happens… 

Reggie: Management will lose job. It tends to be the case. Most of the adoption will be a few years and so hence, the churn is pretty low. That’s pretty good. Good to know. So then when trying to understand this company, what are some core metrics that we should be aware of?

Thomas: You have your visits versus paid memberships. Paid memberships will be your total number of employees from enterprise customers as well as the other paid subscribers and then those who actually visit. These are your visit fees. The stats are… there’s 50 million paid memberships and 10.6 visits. So a fifth of that are actually visiting the clinic. 

I’m not sure whether it was a good thing or bad thing that there’s this number of visits, but just look at things, revenue wise… whether they should push this number up? I’m not sure, but…

Reggie: I mean, everybody is very new in this space. You don’t know what it’s like the… optimal golden ratio. Is it because telehealth is not good enough, that’s what you need to go into a physical location or is it because there’s just a natural extension? At some point in time, you just need to go in for a deeper kind of analysis and all that. I think people also are grappling with it.

Thomas: Why I mentioned this is because if they are incentivized to push up the number of visits, it could be a bit ethically wrong. For no reason, I say “go to clinic lah”. I get referral fee but you don’t tell that to the customer. Everything you pay through the company but the raw numbers or the number of paid memberships will actually help to explain whether they are actually growing their subscriber pool or not.

This is heavily correlated to the kind of customers that they’re getting. If it’s a Fortune 500 company, maybe not all employees are subscribing to it, maybe only 70%, 80% but if the number is growing over time, that means they are growing both the employee count as well as the the number of customers that they’re acquiring… enterprise customers. And then there’s the cumulative activated base. Cumulative activated base is some chim (deep)…

Reggie: Some chim, non-GAAP shit that… every new SaaS company want to have some weird non-GAAP rubbish. Okay, yes, please. 

Thomas: The simplified explanation is that it’s just the rate of people that is trying Teladoc. It is like a free trial and they are willing to try it so use this number. This is the number that they’re actually reaching out to versus the number that is actually paid. Like you said, it’s the conversion rate. 

This number grew 100% in 2020, so pretty good. There’s more people that is actually aware of Teladoc and it also means that they’re more open to it. That means they are willing to try.

Reggie: You know… the non-GAAP shit, but okay. I totally get it. They are trying to help us understand their business. This number indicates the amount of people that are using for free and all but they have not converted into the main paying customers, so there’s a segregation. I think when understanding SaaS companies for a lot of people that don’t yet understand the whole freemium model, it is… now it’s a main thing. Most people do the freemium model and if you can grow your free base, you have a lot of strategy to convert them. That’s the interesting part in terms of the percentage of conversion and all that. As we go along, we will better understand the company and understand the space. That’s the beauty. 

Thomas: They are like a healthcare kind of platform so you can’t use the term freemium. It sounds too cheap. 

Reggie: Ah… okay, okay, okay. That makes a little bit of sense. It’s like how the… you know CNY (Chinese New Year) then they will have the lion dance, right? The lion dance can never appear in front of a clinic. 

Thomas: Yeah. 

Reggie: Imagine if the neighbours see, you run a clinic and… yes, I get it. It’s just a different way of denoting the same thing.

Thomas: Marketing, part of the branding also, that’s why they can upsell to enterprise. There’s certain words that you just don’t use to sell to enterprise customers, that kind of thing. 

There’s paid net ads. Paid net ads means that for each of the enterprise customer that they actually acquire, how many of the subscribers immediately become paid? Sorry, let me rephrase… how many of the employees actually be… paid memberships? So per enterprise customer, how many paid users they acquire? 

Then there’s also the “diagnose on first time”. That means that one shot through one tele medicine call or something, the patients receive a diagnosis.

Reggie: That’s trying to measure the efficiency of the platform. 

Thomas: This is actually at 50%, which is pretty good. The numbers weren’t that good last time. It was like 20, 30%, but it’s risen dramatically. 

Reggie: Okay. 

Thomas: It comes through the wearables. That’s a big help. It comes through more… I would say, robust questionnaires that they also provide to the user so that their doctors have more information to actually diagnose. 

There’s another metric called distinct diagnosis. Distinct diagnosis is not just… everyone has a flu. Can you differentiate the kinds of flu? Is it more like a stomach flu? Is it this kind of other flu and all that? So a number of distinct diagnoses means that the quality of their platform can actually increase because they can go down to the more minute cases, which will lead to… if there is a referral, a more accurate one. This means that there’s no time wasting between… where you go down or… no, why this doctor say like that? It’s not like that, actually.” Then you refer to another one and you refer to another one… This happens a lot more than one might realize. 

Reggie: I never realized that. Okay. Because good, touch wood… I got no health problems and I never thought that was a problem. 

Thomas: Right, right. Just a small story. Sometimes people might not know that actually, they have a very rare condition and some doctors in a certain area might not actually recognize it. Say some kind of auto immune disease or brittle bone kind of thing? 20 years ago, 30 years ago, it wasn’t recognized in Singapore and then everyone would think that person keng (pretend) one. 

Actually no. After that, they go to different doctors, go around, go around, then finally they say “have you heard of this particular disease?” “No idea.” Then it only revealed that yeah, indeed the person actually had it and he must check for very specific things over a prolonged period of time. That kind of thing. 

Reggie: Yes, yes. It’s all part of… okay. By the way, I just want to put it out there that your doctors are not like legendaries. They are humans and they do to the best of what they can. Medicine is always improving and there’s always a more efficient and more accurate ways of diagnosing over time so I think this is all part of what people need to understand when looking at this platform.

At least… when trying to understand the pharma and medical space, when you’re trying to invest here, you at least need to understand what is going on, right? I think for a lot of consumers, when you go to a doctor, you think the doctor will know everything. They will settle everything for you, everything swee swee (perfect). 

But as an investor, you got to really move beyond that way of thinking to understand that it’s a probability kind of thing, it’s efficiency and then over time, new diagnoses that get developed, new ways of doing things get improved and it all adds to this whole being efficient and accurate. 

Thomas: There’s only so much information that you can pack in med school. These are your basics and then maybe they have a certain period where you get attached?

But ultimately, after that… it’s onto your GP or specialist to really just research on your own to really diagnose a good one… to diagnose the proper one. So they will have to go out of their way… really like passion or interest to really understand it and if they don’t know, they really don’t know. 

That’s the thing so having this kind of network has its benefits because they also can cross share information. That’s on the B2B side of things which they might go into next time but for now, it’s just getting more towards the patients. 

Reggie: Fair, fair. Good stuff. 

Thomas: We talk about customers also… more than 40% of Fortune 500. To name a few, T-Mobile, UnitedHealth. Both are listed companies, very big organizations. 

Reggie: Yeah. 

Thomas: For some significance… 2017, TDOC actually had 250+ Fortune 1000 companies. Now, they are saying 40% is Fortune 500 companies so it’s definitely more than 250. That’s a lot. 

Reggie: Moving up the value chain, right? 

Thomas: Yes, yes, definitely. A bunch of other stuff has to do with sales, cross sales. Basically, cross sales is basically upselling their other kinds of services or upselling… erm this is a bit unethical but upselling the other kinds of specialty clinics and all that. That is a mild grey area, but you can look at it and… revenue. 

Another one would be paid net ads and per member per month in dollar value, otherwise known as PMPM. They actually have a chart for this. So your net ads…

Reggie: Enough ah, enough ah. No more non-GAAP… every time give me non-GAAP measure, I got to learn new things. Okay, please carry on. 

Thomas: The net ads can keep increasing.You have a larger number of customers but your PMPM, your paid membership… sorry, your paid membership per month must also be increasing. If it’s decreasing, it means that actually, your average charge, your subscription is going down even though you acquired a new customer. That means that the customer… sorry, that means TDOC is losing pricing power. 

Reggie: Mmm mmm. 

Thomas: By right, you acquire a new customer, you’re showing that “eh, this other platform charge cheaper. Why you charge this much?” and then you see that thing going down. If it goes down for too long, then you know that the competitors are catching up. 

Reggie: Yeah, fair. But this company and the whole space in itself is very infancy, right? There’s a lot of development, a lot of very aggressive kind of growth strategies that’s going on so I wouldn’t be surprised if they slash prices to acquire. The whole acquisition… standard acquisition play today, cheaper to get.

Streaming guys are all doing it but the streaming… okay clarify. The streaming guys are already like what, 10 years into the business already? It’s very different. Teladoc, as a sector, they are still very young. That’s also a reason why they got so many weird, non-GAAP measures… help you understand their business, but yeah. 

Okay, okay. I think that’s a… pretty much the overall arc of what they’re trying to do. It’s a platform. They make money from subscription. Most of their customers are B2B and they have some sort of upsell as they go along whether is it additional service. 

Thomas: Oh, and 80% of their revenue is recurring. 

Reggie: Because of subscription? 

Thomas: Yeah. 

Reggie: Essentially… okay, okay. Pretty cool.

Thomas: 20% is actually the upsell. 

Reggie: Okay. okay. That’s pretty good. I like it. I like the business as a recurring business but some has to say about how easy is it to cut off from subscription businesses, but that’s a whole different discussion as we go along. We can talk about the moats, how sticky the platform is and all that jazz. 

But overall, what are we looking at when we’re looking at this company and this sector? What is the market share? Where are they at overall in this space? 

Thomas: According to some stats from American Telehealth Association, this was… 

Reggie: They have an association now?

Thomas: They do. Since 2017, they were measuring some stuff. In the US especially, they hold 75% market share.

Reggie: Wow. Dominant. 

Thomas: Yup. Total addressable market is $29 billion. $17 billion is ambulatory care. That means one third of the visits is treatable via telehealth. That’s how they actually calculated it. They’re already going into that market and then $12 billion is behavioural health. So 80% of those visits are actually treatable via telehealth. 

Reggie: Okay. 

Thomas: These two things, they are both whacking. Of course, other people are also starting to whack. They have other similar apps for the competitors. They are number one across the board. Number one across… in terms of ranked by average, monthly active users, by downloads, installed base.

Reggie: Is there a review? App review?

Thomas: Have. You can go and search. There’s Teladoc, there’s Doctor On Demand, there’s LiveHealth, Online Mobile, there’s Amwell, AMWL and then there’s MD Life and a few more other generic apps and this is just in the US. You can just see the different kinds of experiences that you can get from the other apps as well but a lot of other competitor apps, definitely. But it’s what the ecosystem that these competitors can bring to the table that will ultimately challenge Teladoc. 

Reggie: Okay, so this is a very young space. Are we seeing growth in the sense of competing with competitors or are we seeing the whole sector growing? This pie is just going to get bigger and bigger and everybody can ride this. I think there are fundamental differences when evaluating these two different trends, whether I’m thinking someone’s lunch or is everybody just getting more lunch because we are all eating someone else’s lunch. It’s a very different… 

Thomas: If you talk about US and just now we talked about total addressable market which Teladoc wants to have, actually,it’s the first one so it’s a limited market based on that. Because there’s only so many in a year that you can service by ambulance or by… it should not increase. Your population size increase also, it doesn’t mean that your number of… 

Reggie: It usually moves in tandem. There’s some sort of reflection there. 

Thomas: Yes, yes and if you’re counting on your number of recurring revenue to actually increase, it means that there’s likely going to be more cases, which is bad. So you think… okay, if the person has a chronic condition, keep going back one. That one no choice. But how many times a person can go in ambulance? You know what I mean? So this thing is a limited market. The TM will not grow fantastically bigger. This is roughly fixed.

However, they can grow overseas. Telemedicine is starting out in US. There’s this big pie that they can pay. Their infrastructure also, can be ported overseas but you need a network. 

Reggie: Yes.

Thomas: So they are trying to go into other countries. They are actually… through the acquisitions. 

Reggie: Acquisition again. 

Thomas: Acquisitions… they claim to be in 130 countries. 

Reggie: Must see their financial breakdown later. 

Thomas: Majority is US. All their acquired ones is just here and there. You’ve got some ecosystem and little service. But it’s a very small pie. 

Reggie: Yeah. I think for a lot of people that are new to being in the pharma space or in the medical space, as an investor, you need to know that it’s not… if anything is non-linear, this is extremely non-linear in terms of the growth, in terms of state-to-state differences, legislation, country-to-country. It’s very different and it’s not like “oh, you do very well in one country. You can definitely scale it elsewhere.” It’s not like selling shoes. A lot of companies are… “oh, our growth plans is to go to all these foreign markets and make it big.” 

Costco expand to China, Nike… whatever. Those guys are doing very non-sensitive kind of things: consumer deliverables and FMCG (Fast-moving consumer goods) and brands and all that. But when it comes to medicine, when it comes to pharmaceutical, when it comes to,this whole medical space, people need to understand that scaling is not just “start an app elsewhere”. There’s a lot of integration and there’s a lot of… trying to understand local policies and all that.

Thomas: Yeah. It’s really the knowledge. You need certain expertise also. 

Reggie: Yeah. Okay, that’s cool. So are we seeing this company at this moment in time plateauing in terms of growth, or are we… because they are already so big. Is that why they are trying to get the market abroad? What is the situation for them?

Thomas: The growth plans… it is still growing, but in the short term. Mid term, likely will plateau so they are trying to grow in terms of other kinds of use cases. That means… okay, you have the total addressable market but in each of them, it doesn’t mean that your competitor can support the same field.

Number one, they need that to be supported by all the insurance coverage. Number two, being able to have their specialties on board to serve these kinds of needs. Each of the total addressable market, you can slice them even further by… like Alzheimer’s, by certain kind of chronic care things and there’s like hundreds of those. It’s really also prioritizing which is the ones that is needed right by the location. 

So it’s about execution. It’s about a lot of work in that aspect to get it done. Mid to long-term: what is their plan? They could keep acquiring. They could go into different business models, but then they start to encroach on more of the actual healthcare services like a hospital or even the wearables market. In that territory is where they will face your FAANGs (Facebook, Amazon, Apple, Netflix, and Google)

Reggie: yeah, your big boys are all here.

Thomas: So they could be comfortable in this particular niche, but likelihood is that it’s going to plateau.

Reggie: As an investor in a growth company, I would think they’re priced as a growth company at this moment in time so I think that’s something that people need to be aware of. They’re not in… there’s no endless amount of growth here and they’re not operating in a silo. There are a lot of other startups or even like serious companies in other countries also that are doing telehealth and they’ve integrated in the local environment.

So M&A is a strategy. Yeah, yeah. Okay, I get it. We have to talk about the financials. What is their numbers? Are they financially strong or are they governed by some Wall Street guys and just acquire and acquire? 

Thomas: We’ve got numbers from 2021 TTM (Trailing 12 months) versus last year, 2020. Revenue is at $1.37 billion compared to $1.09 billion so it grew and it’s recurring 80% of it. This is not bad but you talk in terms of cost, it’s almost the same. It was like $1.38 billion compared to $1.12 billion. It was like whatever they made, they just lose a little bit, so they’re covering with a lot of other growth, acquisitions wise.

Operating margins, they’re making very little. No, sorry, let me rephrase. They are losing but not by phenomenally large numbers so it’s like just barely below break even. You look in terms of cashflow, it’s $0.21 billion, that’s $210 million versus $90 million.

Operating cashflow, just operating cashflow alone is actually positive since 2019. You see a lot of that cash which they are getting through the revenues really being spent back into acquisitions and in growth so that’s why the numbers looked the way they are. For debt, it’s at $1.38 billion versus $440 million so definitely, it has ballooned.

Reggie: I mean they acquire… much like any other people that are going on an acquisition spree, you will see this debt thing balloon or you will see a lot of new equity being sold into the market so it’s all part of it. 

Thomas: And probably, they also finance acquisitions through debt. It’s just getting larger and larger. Sustainable or not, it’s a very big question mark.

Reggie: Mmm mmm. Earnings per share became more negative. 

Thomas: Yep. -$6.20. 

Reggie: Did they release more equity as a result of that? Why are they losing more…? 

Thomas: A bit of both. They are both losing money as well as printing more shares. 

Reggie: Selling more… that means you are getting diluted as an investor. Raising more debt also means that it’s adding more risk to your per share. Your per share debt is getting higher…

Thomas: But they are growing! 

Reggie: That’s the thing, right? Yeah, we got to look at valuation as we go down this path. But are you concerned about their financial health at this point?

Thomas: For sure. 

Reggie: We sound like some boomer, cheesy value investor… “this company must be very healthy.”

Thomas: Of course lah. You want to put money into a losing money company? I mean, there are certain types of investing for that. Like really early stage ones sure. I think that’s fine. You’re just investing in the prospects of the company.

Reggie: But they’re not early stage anymore. By any chance of early stage investments, these guys are not early anymore. You are buying into a matured… I would say in their core business, they are already matured and you have to see the next bulk of growth from another vertical, whether is it insurance… insurance is a great business. Big margins and if they have all the data, then they have the actual capacity to be a very good insurer and all that jazz. 

So we need to see that kind of growth prospect, if not the market would beat it down any time when the growth plateau. 

Thomas: Right, right. And also because these financials, they resemble very much like Cloudflare. There’s a lot of revenue, but they are spending almost the same amount back into the business then similar kinds of results that you’re going to see.

But the difference is that is your market growing or is it the same size and shrinking? Is the company actually something that you want to invest in? There’s always other comparables, right? It doesn’t mean like “I really this company so I put money.” 

Reggie: Yes. Yes.

Thomas: There’s other options. The reason why we look at earnings per share is because for that dollar that you buy for one share, how much is it giving you back? If it’s always negative, then of course it’s going to lose money. Stock price might increase, but you… deep down just know that the company is actually losing the money that you give it.

Reggie: Yes. 

Thomas: Is that what you want? If you’re okay with that… I don’t mind being a growth investor in the whole until to the point where you get your expected return, then sure. But you need to go into this and really understand that it’s not really a boomer mentality. You should be doing this, I hope. 

Reggie: Don’t be a Tik Tok investor. Just watch Tik Tok… “5 things you should buy”. 

Thomas: There’s a lot of different reasons why price moves. Price is not exactly the same as value but you can go and read like Warren Buffett and all that and then your mind will be open. 

Reggie: After you read Buffett, you want to read many other people. Phillip Fisher and a lot of other guys. He’s not the only guy talking about value or all, but yes. He’s just the more successful one, supposedly. Cool stuff.

So I would say the company financials are a little bit wonky, much like any other growth companies that is stuck in this process of transition. They have to either keep growing or they have to be profitable. Either way, the market will then reprice it based on the growth rates.

We’re seeing like top line growth, not as wild. About 20, 30% at this point in time. So yeah, let’s just see how the growth goes along. But they are a software company. I would definitely think that they are more sticky than Cloudflare, but that’s for discussion as we go along.

Let’s talk a little bit about the team. Who is managing these guys? Why are they going on an acquisition spree? Why are we not focusing on organic growth? What’s going on? 

Thomas: Okay. The CEO, his name is Jason. He was there since 2009. Previously, he was at Oxford Health and WellPoint. WellPoint is now Anthem, also a listed company. You can go search… and Empire Blue Cross Blue Shield. I’m not entirely sure what this one is. But some background. He has a Bachelor’s in Arts in international relations at UPenn. 

Reggie: Explains M&A. 

Thomas: Yeah, maybe. Maybe he’s… got a network, talented in some ways. Let’s not judge. 

Reggie: I already judge. I mean, we talk about this to judge the company, right? For education and entertainment purposes only. Not recommending. 

Thomas: Yes, yes, yes. There’s Kelly Bliss, president of the US Group Health. She does sales, client management, client and commercial operations. Previously, she was the Chief Client Officer at Teladoc, so quite relevant… also at Best Doctors. Best Doctors was one of the competitors I mentioned earlier. She was the Chief of Staff. 

Reggie: Second biggest person in the company. 

Thomas: No, that means that HR became sales. 

Reggie: Oh, okay. Fair, fair. 

Thomas: Her background was industrial psychology from Nichols College. Joseph DeVivo, he’s the president for the hospital and healthcare systems. As we progress, you will see a lot of presidents so these are either acquired or they were poached over. 

Reggie: Ah. Okay, okay. So these are all the acquired guys which eventually will fade out of management. Do you think so?

Thomas: No, I think they will still head off because the structure internally… 

Reggie: It’s not like a software company. 

Thomas: It’s a software company, but it’s not really a software company. 

Reggie: It’s like a medical conglomerate with a software spin. 

Thomas: Yeah. 

Reggie: Okay, so we’ll continue to see these guys around. You will not see product integration to a point where the founders will leave or the presidents will leave.

Thomas: So hospitals and health systems, this is what Joseph takes care of . He was previously the CEO of InTouch Health then he was acquired in 2020 by Teladoc so that’s why he’s there. He was also the CEO and president at AngioDynamics, and VP and general manager at US Surgical. US Surgical is one of the divisions under Tyco Healthcare, another big company. His background is Bachelor of Arts in business administration.

The next one is the Chief of Human Resources, Arnnon Geshuri. He was at Livongo Health until the merger with Teladoc. This is the wearables one. Previously ,to Livongo, he was the VP of HR at Tesla. He was the one that grew the … from 400 person company to 35 000. 

Reggie: Respect. 

Thomas: He was also a senior director of staffing ops for Google and also previously at E*TRADE Financial and Applied Materials. Quite diverse, this guy. 

Alon Matas, he’s the president for BetterHelp. He’s got 20 years of entrepreneurial experience. BetterHelp was also acquired by Teladoc in 2015, but he still runs BetterHelp. So he has really kept as separate divisions but they share data, they share integrations and stuff like that. He founded other companies as well. 

The CIO is Jeff Nadler. He’s got electrical engineering background from Union College. There’s Mala Murthy which is the CFO… senior exec position at American Express, CFO of Global Commercial Services at Pepsico. Comm science engineering from Jadavpur University and MBA from IIM (India Institute of Management), masters of public and private management from Yale. 

Actually, they are a software company but so far no…

Reggie: Yeah, I don’t see serious software guys in the mix. A lot of healthcare guys. 

Thomas: Yes. Lastly, we have Bimal Shah, the Chief Medical Officer for product analytics. Previously… at Livongo then also merged then he joined. He was in the VP for the service line at Premier. He’s also an assistant prof at Duke. I think primarily, they grow through acquisitions but you also have to see who is actually managing this whole tech infra.

It might be integrated, things might work well and all that, but whether it can actually scale… 

Reggie: Cause for concern … feels like no tech guys, exactly like what you said. They are a tech platform. I do not see them as a healthcare company. They are not like a healthcare company on Zoom. That’s not what they are trying to sell us. So I’m continuing… I’m going to expect continuation of the lean model where it is data driven, marketplace kind of play with additional stuff to grow their ecosystem. It’s not just a pure marketplace like shopping like that, with additional wearables and all those things to reinforce their stickiness as a platform play. 

But it’s a cause for concern in my view that there is no tech guy in this space when you’re handling sensitive data and a lot of data: insurers’ health data… 

Thomas: But they have a very reliable outsourcing.

Reggie: Let’s just be extremely honest, right? If there’s a data breach at Teladoc, this thing is going to go down. It may not go like boom all the way down, but it’s going to get affected. People are going to question whether they can trust the platform. That’s the reality. When you’re running a small company, you don’t get attacked. You don’t have money to be attacked. You look at their financial position… but as they grow and they become more and more viable, I definitely want to see some serious backend tech guys managing data and all that. Even if you don’t have strong UI guys in front or ladies in front, at least I want to see some serious backend data management people. 

Thomas: Yup, yup. 

Reggie: Yeah. It’s such a weird mix. I mean, M&A… because you keep M&A-ing, you keep acquiring, then this is what you get. You get a Frankenstein bunch of people that came from everywhere. But that’s not to say they have not done a great job, okay? That’s not to say that they’ve not done a good job so far. But whether can they continue to grow and continue to scale? I think technicalities wise, it’s a question mark. What are your thoughts?

Thomas: This might happen a lot actually for startups. They might be very heavily on the sales, marketing driven side of things, but they don’t have any means of production. They outsource. They could actually get a lot of sales, get a lot of traction and all that. But over time, this bloat of software, there’s no architecture, there’s no organization… might bite them in the long run.

One reason is because of these preachers and all that, but it may also be because of the level of scale that they want to grow into. Cannot already, it’s already reaching the limit. More often than not, these kind of companies will not have a strong engineering culture. People just keep leaving. When people keep leaving, you don’t… basically, your brains on the organization to hold all these things together also leave. 

Reggie: Yes. 

Thomas: Document as much as you want. No one knows how to find a cook. You’re also in a problem. You outsource everything, then you are reliant on other people to actually build your core business and that’s very bad. 

Reggie: Yeah, yeah, yeah. They are a tech business. Let’s not forget that they are a tech business, but it’s still amazing how far they’ve come. They’re not by any chance a small player. Maybe we will never grow our company to anywhere close to them. So I think salute to them, but as an investor, at this point in time trying to enter the company, you’re not early stage. All these kind of engineering reality and technical lack becomes a real thing. 

Thomas: Yep. 

Reggie: Okay. So then let’s move into overall discussion of the company. After you look at this whole thing, do you think they have some moats? What are some things that they can develop to become a serious player and be dominant?

Thomas: They have data, right? Let’s just assume it’s well done and then they have different use cases which they are also going to like acute care, chronic care, episodic care. These all needs certain kinds of data points and you have this available to provide to insurers. They’re definitely going to buy, definitely would want to work with you because you can help them to reduce risks in some way and you can negotiate better contracts. 

The other thing is that they have this proprietary data. They can analyze it in funny ways which will also help to improve their platform, provided they have the engineering capability. Over the long term, actually this is very powerful. If they want to work together with certain clinics or certain hospitals… 

Reggie: True. 

Thomas: Basically, give them more leverage. 

Reggie: Imagine if they acquire some genomics company and they got all the DNA integration, this whole thing. It will be a marvel to play around with all these. 

Thomas: Maybe not until there… It’s more… say if they have a wearabl and then they have some kind of analytics associated to it. They can detect when a certain symptom appears and already recommend what is a possible solution. Things that… 

Reggie: But I’m definitely thinking that they will acquire some genomics company, some kind of DNA… the swab. They’re trying to gather written genome kind of thing .That will add to the colour of the dataset that they can have so that will be pretty interesting.

Don’t be surprised in the next year or two, you see them acquiring CircleDNA or something like that, one of those DNA company that’s acquiring a lot of retail customers at this point in time. 

Thomas: And if they’re collecting this information also, it’s easy to pass it along to the hospitals directly instead of electronic record from here, here and here. Then you’ve got to go to five different places, collect first before you go to the clinic. 

Reggie: Hospital records are one of the shittiest. We can talk about this another time, but yes. Finally, there’s some disruption in the hospital record ecosystem. Of course, the whole data breach, everything is a real thing. That’s why they don’t innovate. 

Thomas: And then, their health plan that’s covered… so this is the coverage that I was talking about. Having more of these being covered, 50+ health plans that they are covering, which is a lot. People can just claim without worry and they don’t need to check one by one. They should chec but even if they don’t, they know that actually they can be covered. The company is also well assured that their employees are well taken care of. 

This is a form of moat. If you go to… if another competitor to Teladoc comes to their enterprise customer and say “hey, we also have that same solution. We can undercharge them by 20%. You want a not?” “You have these coverage a not?” “Don’t have.” “You have this one?” Don’t have.” “Oh sorry. Cannot.” So that works in their favour.

Reggie: Fair. 

Thomas: The customer and partner networks… 40% of the Fortune 500. That’s pretty good. That’s pretty decent. 

Reggie: Good. 

Thomas: Your reputation is there and having the amount of customers already. You just go to another Fortune 100 company and say “hey, these other Fortune 500 companies are with me. You want a not?” That reputation is important. That brand is important. They also work with the global insurers and financial services firms. It’s 70 plus of them so the more they have of this, it’s even more difficult for others to actually penetrate. 

Reggie: Yes. 

Thomas: That’s a reinforcing thing. Another would be their physical networks. Of course you need clinics for people to actually go down to once you send them over for referral, 11 000 care locations. It’s spread out across the US. The more that they have, basically it’s good. You can cover a wider geographic area.

But I put this as a lower priority because basically there’s still a physical constraint. It’s not something that they can control also. If they are also just spending money to acquire more physical network, it’s a problem rather than a physical network shoud come to them, which they’re trying to do. 

As they grow this, I think this becomes a stronger moat, then it’s reinforcing. They can protect their market share at least even though there is a solid one. So yeah, those are the moats. 

Reggie: Fair. Honestly, for a company of this size to have all these moats, it’s not simple. But they are in a very complex space, so to have come so far and gotten all these things together then okay. You’ve got to give it to them. They’re pretty good. 

But like we’ve pointed out, all these things with lack of engineering people on the team, it looks like growth is plateauing or going to plateau because they have maxed up the immediate market. They are going to continue to acquire abroad and that’s going to affect their financials. You’ve got to see if it works. As we go along, can they integrate and scale as we go along? So that’s kinda all to the company as a whole, but if we want to take this company and reference it within the whole market, what are some of the risk factors that we should know and what are some other growth opportunities as a retail investor that we should be aware of when trying to analyze this company? 

Thomas: I think the competitors is something that shouldn’t be ignored. Other than American Well, there’s also Doximity. It’s been doing this since 2009 as well, also listed: DOCS, and then there’s Amazon and Microsoft and there’s Google Investments. There’s also Apple and a few other startups that’s trying to do the same thing. There’s also Doctor On Demand which is one of the key startups. There’s also fighting them on this. A lot of people are in this space. 

We’ve thought about all the startups, we talk about the platform. It’s more or less a similar one. They are one of the highest market share, sure. But they’re not covering the angle, which the FAANG companies are doing… FAANG plus Microsoft. So Amazon, Microsoft, Google, Apple, let’s just talk about these few. 

They are going more of the enterprise angle, but as a system for an enterprise to use inside the company, it’s like a ERP system kind of thing. Or they are going to the direction of just heavy on wearables. So in a healthcare clinic, in hospitals and all that, say if you have your Apple Watch. It’s got all the sensors that the healthcare institution needs to do some kind of diagnosis. Apple has their own kind of ecosystem.

So this platform is really automatic… they have the data, they are able to use it, Very sophisticated infra. Google Investments, Amazon, along the same track for healthcare as well as for telemedicine. These guys are well, tech companies so they probably know how to build things more efficiently than Teladoc.

That is some cause of concern. It’s also a market which Teladoc hasn’t really fully gone into. Livongo is primarily just people at home, you have a tracker, you have some kind of simple sensor, but it’s not to the level of Apple wearable device. They plan for the Apple Watch to become the device for healthcare institutions to use but it’s on a different level. 

Reggie: But it may not be a competitive thing. They could connect. It could be an integrated thing. It’s like how Spotify is integrated on all these different platforms and a lot of software are integrating also so I really don’t see them… definitely a competition? We got to see their appetite as we go along, see what are these companies trying to do. But I would think just saying the FAANG guys are going to challenge them. It’s not as simple, I feel… but the FAANG guys is definitely more technically advanced. Definitely can create better products, but whether or not can they integrate into the whole platform play… 

The platform play is hard. I think that’s the part where I see a little bit differently. I don’t want to simplify the whole “tech definitely can fight them” because there are a lot of things that tech guys do very well, but honestly, in healthcare it’s… 

Thomas: It’s a different game. 

Reggie: It’s a whole different game and you don’t see big tech guys carving out big markets in a tech space yet, even till today. This is not their first attempt in trying to do healthcare and all that. So that’s an interesting thing to note, but definitely we’ll see better wearables, better data collection from all these tech guys, because that’s the advantage. Maybe as an investor, you can see whether is Teladoc going to come to an arrangement, to do some sort of API, to do some sort of connectivity where data can be transmitted across different platforms.

They don’t need to fight everybody, does not need to operate in a silo. 

Thomas: Correct. 

Reggie: They can integrate with other people. That further cements their position because you wouldn’t really want to attack your own guys that you integrate with. 

Thomas: Apple would primarily focus on the wearables market. 

Reggie: Yes, yes, yes.

Thomas: Hardware… you can use your iPad. You can use your wearable inside the hospital, sure. But platform, let someone else do that. 

Reggie: Let someone else do. I think Apple is not very interested in doing the whole platform play. You see what they do. They’re not very interested in doing platforms per se. They want to do apps and services, very small things to elevate their walled garden kind of hardware ecosystem, but not a whole new platform. Maybe Microsoft has a bigger kind of push to these kind of things. 

Thomas: Yeah. Amazon wise, I think it will be the closest company in terms of platform. 

Reggie: Amazon compete with everybody. 

Thomas: I mean, they are a platform company. E-commerce and all that.

Reggie: And they have the pharma… the medical to send medicine to your house and all that. 

Thomas: Yes, yes. I think Walmart also recently announced that they’re doing it but in small ways. Apparently, 3 million of their customers all have diabetes, so they created their own insulin just because of it. 

Reggie: Wow. Yes, yes. Recently, there’s been a lot of talk about insulin development, so yes. That’s an interesting development. 

Thomas: I think the last risk will be because there’s already so many players, right? Eventually, they will reach a level of maturity similar to Teladoc so the moat becomes less of a thing. Everyone else also has the same kind of coverage? Pricing power would definitely be something that the rest of the enterprise customers will start to look at also. 

Reggie: Yes. 

Thomas: You can still have the same number of customers but they are just going to pay less because they see that I can just switch so it’s a two way thing for negotiation. Yeah, I think those are the major risks for them. 

Reggie: Yeah. Okay, that’s cool. I think overall, the company has done an interesting job so far to get to where they are. Over time, where I think they can potentially become… there is some level of trust that needs to go into developing healthcare platform. It’s not just an app. I can Tik Tok and I can Instagram, I can switch around. It’s very lifestyle. It’s not sensitive but if Teladoc can become that beacon of truth and security and reliability, then yeah. You never know. They could really become a dominant platform player but as with any other platform players, the challenges are real.

It’s not just “oh, I just want to do a platform” so you will not see growth in a linear fashion. They will continue to acquire. The financials will continue to look similar and we just got to keep observing this thing as we go along. But yes, I think our base case is similar to a lot of other growth software, platform. They are very expensive at this moment in time so it is for you to decide. But overall I think that was great discussion. Any final things you want to add about Teladoc? 

Thomas: Interesting space, interesting company. I think the business model is also quite different from the rest of the SaaS or something… 

Reggie: Yes, yes, yes. This is new.

Thomas: Their moats are more physical, more tangible. You can already know that they can hold the fort, metaphorically speaking. “Hold the fort”… they have a moat. They have a physical moat. 

Reggie: Our dad joke level… but yeah, I get what you’re saying. Okay. Good stuff. Not just another SaaS, but still a SaaS. Take care guys. See ya. 

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