Teladoc Health, Inc. (TDOC) Q3 2018 Earnings Report, Transcript and Summary

Welcome to Teladoc's Third Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions]. It is now my pleasure to turn the floor over to Kelsey Turcotte, Vice President of Investor Relations. Kelsey, you may begin your conference.

Thank you, operator, and good afternoon, everyone. I'm Kelsey Turcotte, Vice President of Investor Relations at Teladoc. Joining me on this afternoon’s conference call are Jason Gorevic, our Chief Executive Officer; and Mark Hirschhorn, our Chief Operating Officer and Chief Financial Officer. We look forward to discussing our third quarter 2018 results with you. Today, after the market closed, we issued a press release announcing our third quarter 2018 results and filed our Form 10-Q. The release and filing are available in the Investor Relations section of teladochealth.com. As a reminder, Teladoc Health 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 Health 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 contains certain non-GAAP financial measures that we believe are important in evaluating our performance. For more details on these measures, the most comparable GAAP measures and a reconciliation of the two, please refer to the press release posted on teladochealth.com. I would also like to inform you that Teladoc Health is presenting at the; 27th Annual Credit Suisse Healthcare Conference in Scottsdale, Arizona on Tuesday, November 13th; The Jefferies 2018 Global Healthcare Conference in London, England on Wednesday, November 14th; The 30th Annual Piper Jaffray Healthcare Conference in New York on Tuesday, November 27th; and the Citi 2018 Global Healthcare Conference in New York, on Wednesday, December 5th. And with that I'll turn it over to Jason. Thanks Kelsey.

Thanks, Kelsey, and thank you all for joining us this afternoon. And thanks again to those of you who joined us for our Investor and Analyst Day on September 27. After the market closed today Teladoc Health reported another strong quarter marked by continued momentum across the business and healthy demand for our full spectrum of services. Some of the highlights include total revenue for the quarter of $111 million, which exceeded our expectations and was up 62% on an absolute basis, and 29% on an organic basis. Gross margin of 69%, which came in on plan reflecting our overall mix shift in the acquisition of Advance Medical. Positive adjusted EBITDA of $6.3 million. Strong visit volume of approximately 641,000 visits in the quarter up 110%. U.S. paid membership of 22.6 million members representing growth of 18% after adjusting out the $3.5 million Aetna's fully insured lives from 2017 and our average per member per month of $1.08 compared to $0.79 for the same period last year representing a 36% increase. Mark will provide more details on our strong third quarter financial results, but before that I'd like to focus on a few key developments for the Company. First, we continue to make great progress on the integration of Advance Medical, which has now been a part of Teladoc Health for five months. The combination of the two highly complimentary companies gives us global scale that is unmatched in the industry with a local presence to meet the needs of our diverse client base. Interest is very high and we see opportunities to sell into current clients as well as land new ones. I'd also like to take a minute to thank the team for their hard work in bringing the two companies together. Your passion for and dedication to transforming how people access high quality healthcare around the world is truly inspiring. To that end, we launched Global Care in late September, targeting large multinational employers and insurers. This new service makes it easy for members to talk to a doctor who has the knowledge and experience to help guide them through the local healthcare system. Global Care is available 24/7 in more than 20 languages and delivered through our mobile app. There is no other solution like it in the market and the pipeline is building nicely. On a direct to consumer front, we continue to roll out our integrated product offering with CVS Health, adding another eight states last month to bring the total to 18 states plus Washington DC. This is a seamless experience for consumers entering through the CVS app and an integral part of CVS Health's commitment to delivering high quality care when and where patients need it, at prices they can afford. We look forward to expanding the scope of our relationship with the MinuteClinics and moving ahead with insurance reimbursement. We're now in the final months of this year’s selling season and as we discussed at Investor Day, the pipeline is converting at robust rates. Clients appreciate our differentiated suite of services, unique surround sound strategy, global footprint, and compelling data driven ROI. This is true across all channels where we're winning new logos successfully, cross selling into existing accounts and displacing competitors. I feel very good about where we are and how well the team is executing. In addition, there was an encouraging regulatory development last Friday as CMS released its proposed rules regarding the ability of Medicare advantage plans to include telehealth as part of their bids for the 2020 plan year. The proposed requirements are completely consistent with our current commercial health plan offerings, meaning that under these proposed rules, we would be able to offer our full suite of services to all 21 million Medicare advantage enrollees. CMS also stressed in the proposals what it views as the benefits to access cost, convenience, and quality arising from telehealth. This is a very positive development and welcome recognition of the value Teladoc Health can deliver across all segments of the population. Before I turn the call over for a review of our financials, I'd like to take a minute to welcome Mark Smith to our Board of Directors. Mark is currently a professor of clinical medicine at the University of California at San Francisco, a visiting professor at the School of Public Health at the University of California at Berkeley, and a nationally recognized-health policy and delivery system expert. He is a distinguished physician and healthcare leader with a passion for assuring access to care for all. This not only compliments our mission and commitment to transforming the care experience, but stands out as a testament to our intense focus on clinical quality. We're very pleased to have Mark join us. As we close out 2018. I want to emphasize my confidence in our ability to deliver high quality care during our traditionally busiest quarters Q4 and Q1. As you may recall, last year's flu season was extremely intense but very concentrated due to a late start and an early end to its peak. The first few weeks of this year's flu season are tracking very slightly ahead of last year and we've been experiencing a steady increase in volume since mid-September. I'm confident that we are well prepared with infrastructure and capacity that will scale accordingly if this flu season resembles last years. We feel very good about what we've accomplished so far this year and about our leading market position as we enter 2019. Tailwinds in virtual care continue to increase including the positive developments in Washington and our broad suite of services and comprehensive approach to delivering quality care is clearly resonating in the market. We look forward to a strong close to the year and to seeing many of you at the upcoming conferences. And with that I'll turn the call over to Mark.

Thank you Jason, and good afternoon everyone. I'm very pleased with the third quarter, both from a financial as well as an operational perspective. I've spent quite a bit of time with our wonderful colleagues at Advance Medical where our integration work is progressing nicely and customer appetite for our Global Care solution is very strong. We continue to build on our significant differentiation in the market, which is now reinforced by our scale and global presence. In fact, today we launched a new Global Care initiative with AXA Global Health Insurance plans. This launch follows a successful pilot that formed the basis for this new client offering. Our eight geographic hubs will help support access members in over a 100 countries. Now, I would like to share some of our key financial metrics that Jason referenced earlier. Total revenue for the quarter was $111 million, a 62% increase year-over-year. We grew 29% on an organic basis, generating quarterly organic revenue of $88.3 million. Revenue from subscription fees increased 60% from the third quarter of 2017 to $96.6 million. As expected, two quarters of our subscription revenue is domestic, as subscription fees from the U.S. accounted for $72.5 million or 75% of total access fees, while international subscription fees accounted for the remaining 25% or $24.1 million. For the third quarter, subscription access fee revenue accounted for 87% of total revenue. As of September 30, U.S. paid members totaled 22.6 million, an increase of 18% compared to last year after adjusting out the $3.5 million, Aetna fully-insured lives from 2017. As a reminder, our definition of members includes just U.S. paid members that are associated with the PEPM or PMPM, or paid U.S. membership. And under this definition, membership totals do not include visit-fee only access to our services. At the end of the third quarter, we had approximately 9.4 million individuals with visit fee only access. Principally, those individuals from the Blue Cross Blue Shield Federal Employee Program and Aetna's fully-insured population. Our average per employee per month, or PEPM, for the third quarter was $1.08, compared to $0.79 in the third quarter of 2017 or $1.06 on a pro forma basis when excluding the impact from Advance Medical. During the quarter, Teladoc Health completed 641,000 visits. That's an increase of 110% from the year-ago period. In terms of visits, as you can see in our press release, we categorize visits from U.S. paid membership, international visits and visits from visit-fee only access. Moving on to utilization, which we calculate as total U.S. visits divided by Teladoc Health's U.S. paid membership for those members with access to our general medical services. Visits from U.S. paid membership totaled for 439,000. 46% of these visits were paid, while the remaining 54% were delivered under our U.S. visits included contracts. This represents an annualized utilization rate of 7.8% in the quarter, and approximately 222 basis points increase from the 5.6% utilization rate we experienced in the third quarter of 2017. In addition, we completed 166,000 international visits. And finally, we completed 36,000 visits for individuals with visit fee only access. U.S. paid membership visits generated $11.3 million in revenue, a 40% year-over-year increase. This includes revenue coming from general medical visits as well as other specialty visits, which is primarily comprised of expert medical and commercial behavioral health services. Our gross margins were 69.2% and on plan with our expectations following the purchase of Advance Medical. While the quarter's gross margin decreased as compared to the gross margin in the third quarter of 2017, our margins continued to reflect the benefits of our scale and the resulting operating efficiencies in addition to predictable and sustainable positive pricing trends in our evolving business. Total operating expenses in the quarter came in at $92.6 million, representing a 26% increase from the $73.4 million in Q3 of 2017. Eliminating the impact of principally non-cash charges, such as stock compensation, depreciation and amortization, our Q3 2018 operating expenses, less integration-related costs and gain on sale, were $70.5 million or 64% of revenue compared to $52.5 million or 77% of revenue in Q3 of 2017. Our adjusted EBITDA came in at a positive $6.3 million for the third quarter compared to an adjusted EBITDA loss of $600,000 a year ago. Net loss in the quarter was $23.3 million compared to a net loss of $31.3 million for the same quarter last year. Turning to our balance sheet. We ended the quarter with approximately $472.5 million of cash and short-term investments. Our total debt at the end of the quarter was $562.5 million, which consists of our two convertible issuances: The $275 million, 3% convertible notes that mature at the end of 2022 and the $287.5 million, 1 3/8% notes that mature at the end of 2025. With that, I would like to provide our outlook for the fourth quarter of this year in which we currently expect total revenue between $119 million and $121 million; an EBITDA loss between $9 million and $11 million; adjusted positive EBITDA between $4 million and $6 million; total U.S. paid membership of approximately 22.6 million to 23.5 million members; total visits between 720,000 and 820,000 visits; and a net loss per share based on 70.4 million weighted average shares outstanding is expected to range from a loss of $0.36 to a loss of $0.38 per share. For the full year 2018, our updated forecast is now, total revenue between $414 million and $416 million; an EBITDA loss between $36 million and $38 million; adjusted positive EBITDA between $12 million and $14 million; and total U.S. paid membership of approximately 22.6 million to 23.5 million members; and visit-fee only access available to approximately 9.4 million individuals; total visits between 2.5 million and 2.6 million visits; net loss per share based on 65.9 million weighted average shares outstanding is expected to range from a loss of $1.48 per share to a loss of $1.50 per share. As a reminder, we will be providing our full year 2018 results and our 2019 guidance when we announce earnings in February. As you can see, the business continues to perform very well, and I'm very pleased with the set up as we look into 2019. I want to thank the Teladoc Health team for their hard work and dedication to our mission of transforming how people access health care around the world. Thank you all for joining us, and we look forward to seeing many of you over the next several weeks. We'll now open the call to questions. Operator?

[Operator Instructions] Your first question comes from the line of Sean Dodge of Jefferies. Your line is open.

Good afternoon. Thanks for taking the questions. Maybe, coming out of the Analyst Day, Jason, it sounded like one of the key focuses was going to be on bundling more of your services together when either selling to new clients or, kind of, maybe working back through your existing base and cross selling some of the new modules. Now that we're coming out of this selling season, do you have any metrics or maybe some anecdotes you can share with us on how many new clients signed bought two or more Teladoc services versus how that would have looked this time last year?

Hey, Sean. Thanks for the question. I would say, while we haven't given any metrics and we're starting to think about whether we start to put something in place that gives a little bit more of a view into that. More anecdotally, as I look at the closed sales for this year and the pipeline for this year going into 2019, certainly, there's no question we have more sales that have two or more Teladoc products in a bundle of services. We're talking to more and more clients about full enterprise-wide solutions. As we talked about on the Investor and Analyst Day, virtual of first is becoming a central focus for a lot of the larger employers and especially, the larger health plans. And that includes the full suite of services in an integrated fashion that's deeply embedded into their health plan. I would say that is still in the planning phases for a lot of our larger clients and prospects, but they are starting the process by engaging us for two, three, four products in a bundle, so that it's more than a single point solution, but rather a full virtual care offering.

Okay, great. And then one on the CVS launch, now that you've got a few months under your belt there, can you give us a sense of how many visits that contributed in the third quarter? And then any update on, you said it's available in 18 states now, when we'll see the rest ruled out and when we could see insurance coverage?

Yes. So third quarter contribution was still very, very small. This was a soft launch, I think, I mentioned at the Analyst Day, this was done as a no marketing push. Let's rule it out, continue to get a sort of operational wrinkles ironed out, make sure that everything with the consumer experience, is absolutely perfect before we sort of turn on the floodgates of consumer marketing. The goal is to continue to roll out over the course of the year, so that by the beginning of the year, early first quarter were available, on a nationwide basis and we can start to look to CVS turning on their consumer engagement and marketing prowess, right? So there is a significant engine that they have their, especially with their extra bucks, and their loyalty program, and that provides a very, very strong engine to drive consumer adoption. We have a great relationship there as you heard from, Troy at our Analyst Day, and we see there as significant opportunity for expansion of services in addition to starting to ramp up the visit volume.

Okay. And then insurance coverage also sometime between now and then maybe early first quarter?

I wouldn't look for that by early first quarter. That's going to be a 2019 effort, as CVS works with their payer partners on modifying their payer contracts to include this. So, I want to make sure that we're clear on expectations around that. I would expect that to happen over the course of 2019.

Very good. Thank you.

Excellent. Thanks, Sean.

Your next question comes from the line of Stephanie Demko from Citi. Your line is open.

Hey guys. Congrats on the solid quarter, and thank you for taking my question. Just given some of the recent news flow, I was hoping you could provide any color around your behavioral business, just as its relative sizing sales channels or any mix of direct consumer business?

Hi, Stephanie, thanks. Appreciate your comments on the quarter and the question and the opportunity to address it. First and foremost, I would say, we're focused on that tremendous opportunity for us to make a difference to those in need of behavioral healthcare. As I said, many times people don't get the counseling that they required due to issues of access and the stigma associated with mental health. Virtual care very effectively addresses both of those barriers to getting care and we're pleased to be able to address those needs. I've been clear that our direct-to-consumer behavioral business has been one of our fastest growing segments and we've been very transparent about it being a growth driver and a contributor to our increasing PMPM. We see these as positives with all of our primary metrics for that business, including customer acquisition costs, lifetime value of a customer a and membership churn. All of those metrics consistently have been improving overtime. And this quarter, this last quarter was no exception to that, and we've consistently described the revenue trajectory of the DTC behavioral business, which of course is our Better Help business. And as recently as September, we’ve said that the business will generate in excess of $60 million of revenue this year. And finally for the past couple of years, we've consistently talked about diversifying our marketing channels for that product, including the use of influencer marketing of which YouTube is one component. And in fact, if you look at our data in the past 12 months, less than 5% of our new subscribers on Better Help to have come through the YouTube channels. And of course we're constantly evolving the marketing mix as we seek to optimize performance of that business and to answer your question about sort of where we are in the cycle, and I think, I was recently quoted as saying, virtual care, is it still in the early innings virtual behavioral health care is still in batting practice. We're really just scratching the surface on the opportunity there. And I think the growth of that business is a testament to that.

Thank you. Those clarification are super helpful. And then one quick follow-up on a row, unrelated business. Could you just give us an update in the TRICARE ramp and maybe any risk to that revenue stream as the ramp as continuing to be elongated?

Yes, sure. As you know, optimize the prime contractor on the TRICARE business and where the sub. We have a great relationship with the Optum team and we're working very well with Optum on meeting the final implementation requirements in preparation for our launch of that business. We're on track with the launch and expect the first population in Q1. The government hasn't given a timeline for the rollout of the rest of that business, but we have as we put together our projections, we've been very conservative in our view and expectations of the revenue, knowing that there are always variables associated with the government's timeline for things. So we feel like we've taken a conservative and appropriate approach and not withstanding that we have great relationships with Optum and fully expect to roll out that business.

Hi. Good to hear. Thank you for taking my questions.

Thanks Stephanie.

Your next question comes from the line of Lisa Gill from JPMorgan. Your line is open.

Thanks very much, and good afternoon. Jason, let me start with the Aetna’s business. Is it still the anticipation to be revenue neutral for 2018? Is it tracking as expected?

Yes, exactly as expected. I'm fully insured visits are up 60% year-over-year. We monitor that revenue on literally on a weekly basis and it's tracking almost exactly with where we were last year, and of course, that's entering the fourth quarter, which is our busiest season. We've got a great relationship with that and in fact, we're building, we're integrating our technology into their mobile app using our SDK, our software development kit, which will mean deep integration there, which will only be positive in terms of both working together, but also importantly the member experience. And in fact, when I was talking about there was the fully insured utilization being up 60% year-over-year. If you look at every segment of that business, the Aetna business utilization is up year-over-year.

Okay, great. And then just your comments around the selling season and to an earlier question around bundling of some of the different offerings in the market. I'm just wondering, can you also maybe just give us some colors to what you're seeing around membership growth, including new versus existing clients? Are you seeing deeper relationships going into 2019 or is it primarily new relationships?

It's a mix of the two. So obviously we track both sort of same store growth or expansion. We talk about it as the white space within existing customers. And certain segments of the business have more white space than others. So obviously health plans, and especially our international insurance clients, there's a lot of white space not as much when you talk about the direct to employer market there we're thinking more about sort of upselling and cross selling additional products and services, but across all of our segments, and so especially across health plans and the international space, we're seeing expansion within customers have additional membership and then across all of our segments, we're seeing new customers, new logos, new membership.

That’s helpful. Congratulations on a nice quarter.

Thank you. Appreciate it, Lisa.

Your next question comes from the line of Richard Close from Cannacord Genuity. Your line is open.

Yes, two questions. One, just, additionally on the Better Help, if youTube is less than 5%, what are – maybe the bigger channels there, and then I had a question on hybrid models that mark talked about at the – briefly talked about at the Analyst Day. Can you talk a little bit more in depth on those hybrid models?

So I’ll, I’ll take the Better Help channel is and mark can take the hybrid models. We’ve always said for Better Help, social and search are the two primary drivers we’ve expanded into, as I mentioned, an influencer marketing and into providing access through more content-oriented sites, which are focused on the delivery of psychological health and are sort of more consumer-oriented websites for those, who are seeking help. The search and social first followed by other channels. But we’re also in other entertainment media through various consumer engagement strategies. We’re testing out a digital TV and things like that in certain markets. So, that is a business, where a test and learn from a customer acquisition perspective is part of the fabric of that team’s daily work and sort of optimizing the various channels.

Hey, Richard. And I’ll just give you a note on the models that we’ve been seeing. We’ve closed thousands of new contracts over the last several months. We obviously have another sort of six weeks to close hundreds additional. Most of, if not the vast majority, are all the traditional per member per month plus a visit fee. Also, those that are at the higher end of the per member per month with the visit fee included. There have been very few visits. The only proposals and contracts executed, but we continued to really see a thrust through the end of the year of those companies that are looking to sign up and have our services available to them on January 1 launch date.

Okay. Thank you.

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

Yeah. Hey guys, thanks for taking the question. Mark, wanted to ask you just to follow up really quickly on that – question that any kind of push from clients into maybe a pure PMPM only kind of contract, where the visits are included. Are you seeing any kind of uptick in that kind of contract format?

Well, I would suggest that the fastest area of growth for new client wins has been in that small and medium-sized business with the visits included model that higher PMPM.

Okay. And what is roughly that PMPM come out to be? If we look at sort of what you’re averaging currently, is it like one to five range or where does that kind of average out typically?

I would suggest you’re normally in that $3 plus range. It’s a significant multiple on what that average dollar in changes over the entire population.

Okay. And then the question I really want to ask was around the visit guidance for the next quarter, 720 to 820. And if we look at the midpoint of the range, and I appreciate that you’re giving us the international visit number here. I guess just to break that down a little bit, should we assume that international visits to have the same kind of seasonal pattern in the fourth quarter as it does in the U.S.?

Yes. That’s what we’re assuming. So that’s correct.

Okay.

This would be the first volume obviously; we have such a significant contribution from international. But the range is why we’d be conservative to suggest otherwise. The fact is that, they do in fact trend in a very similar fashion as a result of either a very strong or a mild flu season. We’re done with the first month of the quarter. It was a nice – it was a nice month. Trending looks like we’re going to have, as Jason noted, something similar to, or if not stronger than last year.

So then the – so is it fair to say the raise that we’re looking at is really more flu dependent than anything?

That’s correct.

Okay. All right. And then just – sorry, lastly on the Aetna side, you talked about is being sort of revenue neutral here. We did $2.5 million to visit fee, only revenue. Obviously, the Aetna side has the bigger visit fee value here, or is it that we’re expecting a bigger spike in the fourth quarter, because we’re kind of looking at sort of kind of backing into it, it looks like we’re running by my math maybe $7 million or $8 million. Is that sort of the right radius for the full year or is it…

Yes. You’re in the right ballpark.

Okay.

Yes and that would be consistent with where we were.

Okay, perfect. Thanks a lot.

Sure.

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

Hey guys. Thanks for taking the question. Jason, one for you. It sounds like the Advance Medical integrations off to a very good start, good feedback from customers, but I’m curious is you’ve kind of gotten to know the organization more if there has been any surprises either way, positive or negative from initial expectations. And then number two is a followup to that. Are there any best practices that you’ve revealed that you think can be kind of brought over to the U.S. operations and pushed to your current customers that could benefit the organization going forward?

Yes. Thanks, Ryan did. The advanced integration has been fantastic really, working really well with that management team. In fact, Peter McClennen is over there right now with the team working on planning for next year, further integration, discussions and starting to work on client efforts. The team from advance medical has been out to see all of our material, international clients, especially in Europe. I’ll be over there in November just in a couple of weeks, where I’ll see a number of our European clients. I think the biggest, sort of pleasant surprise is the appetite for product expansion within our existing clients. Especially, the Teladoc clients, sort of legacy Teladoc clients in Europe prior to the advance acquisition. We’re also seeing a very, very good response to the global care product launch, which was obviously a result of the Advance medical acquisition and we’re seeing that as a strong response both outside the U.S. as well as from U.S. multinationals. With respect to best practices, I think that the two things are one around the global care product was something that quite frankly we didn’t have. We had done and the opportunity to bring that to market was clearly an opportunity for us to leverage their best practices. And then the second thing is around, we have a team working through sort of comparing expert medical services processes to figure out the best of breed processes as well as identify ways to generate efficiencies. And so I think that that’s going to bear fruit over the course of the next couple of quarters.

That’s great. Thank you. And then we’ve talked about some of the brand-new business segments within behavioral health et cetera, but I’m curious how the provider market is shaping up, especially given, some of the recent momentum with CMS before with teams for some medicare advantage plans, et cetera. Are you seeing that also picked up in the pipeline?

Yes. The provider market continues to grow at a really strong click for us. We just sort of on a percentage basis, that’s probably number one or number two in our growth areas. Obviously, it’s off of a small base. I would say the two things that are interesting in that space are, number one, we have clients looking for more services from us as they expand the use cases for virtual care, which is always encouraging. And we have really good examples of hospital clients, who are very, very committed to virtual care and are starting to see the real value and realize the benefit of those services. We continue to have a robust pipeline there at a very, very active theme and our win rate continues to be very strong.

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

Thank you.

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

Thanks for taking my questions. Jason on utilization, given the traction you're having so far, can you comment on the expectations on neutralization expansion from 100 basis point improvement year-over-year are still in the right baseline?

Yes, I think that's right. I think at the analyst day we talked about, it's more of a, of 100 basis points, but as our outlook on that continues to improve, but you're certainly good at looking at that as a baseline.

Okay. And couple of quick follow ups, one on TRICARE, just to be clear there is no change in contract right now, just implementation ongoing, write now and schedule to be online in Q1, is that correct?

That's correct.

Okay. Last question on the inpatient side, I have not heard much on that in today's call. Just want to see what's going on in the market and any updates on market conditions there?

Can you just clarify what you mean on the inpatient side?

The hospital products that you guys sell, how is that market coming along?

Yes, so that's coming along really well and we see clients asking for more services from us. We see the pipeline is being really robust and we see more used cases for our technology and our clients are asking for us to do some development so that they can employ our technology in additional use cases.

That's great. Thanks a lot Jason.

Alright, thanks Mohan.

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

Thanks very much. I apologize about that hopefully you can hear me okay. My voice is a little shaky. If you accept on this call a Doctor, I think heard a comment Mark, you said pro forma PEPM including Advance Medical would be a little bit higher. I think that was correct, and I'm just curious. Generally it sounds like I'd say at the higher PEPM is that because typically Advanced Medical is that had a broader adoption across multiple services or is it just people were tending to buy more of an all in all inclusive? Just trying to understand that and you can just say if the answer is I misheard then obviously there's a difference? Thanks.

No you heard it correctly, Sandy, the fact is that Advance Medical’s primary component of their revenue is international. The opportunity internationally, Europe, Asia, Latin America tends to be far greater than that in just the U.S. alone because of not only faster adoption, but there is less competition and there's a greater appetite to purchase an all inclusive product.

Got it. That's helpful. That's my only question. Thanks.

Thank you, Sandy.

Your next question comes from the line of Ana Gupte from Leerink Partners. Your line is open.

Hey, thanks. Good evening. So the follow-up on that rule that came out with the CMS and Medicare Advantage for 2020, it could be a very big opportunity from where we sit up covering managed care as well, maybe $25 million total seniors, and how are you thinking about what the potential is for adoption, utilization and the likelihood that you will get market share from the nationals and then on the health systems, whether they'll use more of their own homegrown platform, although they work with you on your networks as well. And what are you doing to plan for that opportunity?

Yes. Thanks Ana. We're very, very pleased with the proposed regs coming out of CMS relative to Medicare Advantage. They really lend themselves to us rolling out our full product portfolio into the Medicare Advantage plans and Medicare Advantage markets just like we have into the commercial markets. The regs really support that, the other thing that was very encouraging is the strong endorsement from CMS of virtual care and the impact that it can have on access, quality of care and cost. And so really couldn't be more pleased with the direction that has gone. The market opportunity, there's about 21 million members across the country who are in Medicare Advantage plans that tends to be a growing number over time if you look at the Medicare Advantage membership over that as you well know, probably better than I do over the last five to 10 years. It's consistently grown in that population. And so we are having active conversations with a number of our existing customers of course we’re north of 35 health plans as clients and many of those clients have MA populations, so we're talking to a lot of them about a virtual care in their MA products for 2020 and we're also now starting to be in discussions with prospects around their MA populations. With respect to the hospital systems, we actually don't see too many hospitals systems going to homegrown solutions. There are a few of them they tend to be very large systems, with which has extremely large IT budgets and sometimes a bias toward developing themselves, but for the most part we see hospital systems going into the market for virtual care, telemedicine solutions. So we think that will be a beneficiary of that as the hospitals realize and know that they can get reimbursed for these services. This of course is on the MA, the trend has been good, not quite as strong but good on the Medicare fee for service side as well. And then lastly, we are hopeful, it's always hard to predict when this is going to happen, but generally the way the state Medicaid regs go in each one of the state Medicaid payment plans goes follows CMS guidelines. So, we are hopeful that will continue to open up the doors into the state Medicaid opportunities, which of course is moving more and more to manage Medicaid solutions.

Thanks. There is a much follow up on that, as far as the business model goes, would you see yourself having more of a shared savings model rather than just the specified CMS PMPM? And adding on a per visit fee, which can be quite lucrative, I would think for the MA population with reduced admissions in addition to ER visits and the like. And then are you planning home health integration typically, that's where the virtual medicine is well used and I think the manner others are articulating digital health approaches around that?

Yes. So with respect to the payment models, I think it's too little, too early to say, we're just starting to have some of those discussions because of course the, preliminary regs were really just published on Friday. I think we'll see some variety of models and we're always happy for models in which we can get paid for the value that we bring. So we're certainly always open to those discussions and then we do see the opportunity being there for us to integrate with some home care plans. We've done some early pilots on that, but those are still in pilot phase. I do think as we go more and more toward the Medicare population, that will be a bigger and bigger opportunity and as I said before that also opens the door to more integration with remote monitoring devices as those tend to be valuable in that population.

Your next question comes from the line of Donald Hooker from KeyBanc. Your line is open.

Great. Good afternoon and thank you for question here. I guess maybe kind of high level when you're bringing together Best Doctors, Advance Medical, now that you have Best Doctors under your belt for a little over a year now and your ramping Advance Medical. When do you kind of feel like you hit full kind of synergies with all this from a selling standpoint? I mean, it’s just going to take a couple of years. I’m sure each year it gets a little bit more synergized. But what is your perspective now sort of the ramp of potential revenue synergies as these three companies coming together?

Yes, it’s a good question. I would say, the 2019 selling season will be the first one. It will be sort of the mature selling season for bringing together Teladoc and Best Doctors. The 2019 selling season will be the first selling season overseas that we’re thinking about sort of legacy Teladoc, Best Doctors business being combined with the legacy Advance Medical. So I would say that’s year one, year one has never maturity. You’re two tends to be sort of first year one is never maturity first year two, you hope to get to a more mature experience, understanding about sort of what the optimal mix is, what the optimal pricing looks like, what the optimal pitches, what clients react to and how you meet their needs best. So I would say U.S. think about 2019 selling season for 2020 as being more mature. Internationally think about the 2019 selling season as being your one with the 2020 selling season being mature.

Okay. So just to be clear, not this selling season for Best Doctors, but next year selling season going into 2020.

Correct.

Got you. And then my next question, and then I’ll hop off. You probably won’t answer it, but I’m going to ask it anyhow. With respect to UnitedHealth, how is the relationship they’re developing, um, in terms of your exposure and opportunities within that health plan going into next year?

I’ll provide an answer. We feel great about our relationship with United across multiple segments of their business. We continue to see growth and expansion, again, in multiple segments of their business. And I think the best sort of thing I can point to is, not only do we continue to see expansion, but wherever we do comparisons of the impact that we’re having versus their virtual care providers or telehealth providers, we come out on top. So I’m optimistic, feel good about the relationship and the progress that we’re making with United.

Thanks Don.

Your next question comes from the line of Sean Wieland from Piper Jaffray. Your line is open.

Hi. Thank you. So just to button up the conversation on better health. Can you just address what the certification and licensing requirements are that you have in place for providers on that network?

So we have a thorough vetting process, we look at state licensure, we look at the licensure of the providers. We are fully compliant with all the state rights and we taken approach that we do with all of our business, which is that clinical quality is the paramount to the delivery of the care. You take very seriously the membership who comes to us for assistance there. And at the same time we are always refining and improving our processes around that, which is why we have a clinical quality committee of our board of directors. And I mentioned bringing Mark Smith onto the board. I think that’s another good example of us focusing on clinical quality.

That’s great. Thank you. And then I may have missed it. On Advance Medical, did you update us on the number of members today on Advance Medical? And what you think the total year revenue contribution will be?

No, we didn’t address any update on members of Advance Medical, we provide end of the year numbers will provide the domestic events medical contribution.

All right. Thank you very much.

Thanks, Sean.

Your next question comes from the line of Jailendra Singh from Credit Suisse. Your line is open.

Thanks a lot. I had a couple of questions if I can ask. First, I wonder that clarification around – your comments around gross margin. I believe on the last earnings call you talked about because of business mix gross margin will drop to like 65% in second half, nearly third quarter have come in better than that. So should we assume like high 60% as a normal run rate going forward and maybe improvement from here and what’s the expectation for fourth quarter gross margin?

The guidance that we provided a month ago remains intact. The margin impact from a very heavy flu season and obviously much more projected visit volume in Q4 and Q1 should in fact bring the margins into the realm of what we have guided at previously. We did have a stronger margin quarter in this third quarter, but that’s principally seasonality.

Okay. And then let me follow-up on the CMS MA proposal comments on telehealth. Given all the uncertainty around how telehealth will be adopted or received by seniors and some concerns around whether they’d be willing to use it at least compared to the younger commercial population. What gives you comfort that MA plans will not push for more like visit only model given they’re probably going to get paid like dollar for dollar. And in fact CMS estimates like $0.09 PMPM benefit, I mean included in the bid submission process. Can you give some color like your feedback on that?

Yes. So I know what you’re talking about with the $0.09. Actually, I don’t think that’s exactly what CMS said. They gave an example, but they actually explicitly came out and said that they don’t know what the cost impact will be because they don’t really know what the impact of movement from one provider to another. They don’t really know what the impact of improved healthcare by people getting care earlier than they otherwise would. They don’t really know the full impact of transportation cost avoidance. And so they gave what I think was an example of how they work up. But I think they acknowledged themselves that they don’t really yet know what that cost impact is going to be. Just to be as transparent as I can be, all of the government – the payers we’re talking about those manage Medicaid as well as MA, we’re talking about more traditional models relative to what we’ve done in the past with a visit fee and per member per month. It’s not to say that’s going to always be the case or that that’s always going to be there won’t be other models that we look at as I said, when I responded to Ana. But I think we’ll – we’re not seeing that as a macro trend.

Okay. And then the last question, I know if you have this data. What percentage of your third quarter visits would actually repeat users? Do you have the data for third quarter?

Repeat users, I don’t have it on top of my head. Mark and I are staring at that number. Sorry.

Okay. No problem. Thanks a lot.

Thank you.

Your last question comes from Matt Hewitt from Craig-Hallum Capital. Your line is open.

Hi there. Most of my questions have been answered, but maybe to wrap things up. Regarding the Advance Medical acquisition in the software integrations, have those all been completed at this point? And if you plan to have a consolidated platform that’ll be used in all markets going forward or will the markets have differentiated models depending upon some of the different offerings?

Our goal is in fact, to have a ubiquitous platform throughout the world providing those individuals who are either in country or traveling with the same exact access point, same format and same expected the high quality of service regardless of where they request their medical consultation. The integration of the app has taken place for certain parts of the Advance Medical existing services. The real in-depth and very deep integration will take place throughout 2019. And that really ties into what Jason was suggesting regarding selling seasons. When the team has that integrated app, we feel that we’re going to be in the best possible position to offer those services on a ubiquitous platform, but on a comprehensive basis throughout 2020.

I think I’d just add to that that, we see a pretty significant opportunity to rollout our engagement capabilities among the Advance Medical clients. And that was a clear area to Ryan’s question earlier about best practices. That was a clear area where the Advance Medical team was excited to get the access to our assets and capabilities with respect to our surround sound engagement.

Okay. That’s great. Thanks very much.

Thank you.

So thank you all. We appreciate it. We had a really great quarter. We feel very good about our momentum going into 2019. Our broad portfolio of services and our geographic footprint are being very, very well received. And as you can see, we have a lot of tailwinds in our business. So we appreciate your time today and your questions and look forward to seeing you at some of the upcoming conferences.

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